Can't Evict Must Foreclose???
BOGUS LEASE OPTIONS
A Purchase by Any Name
By Stephen Stralka
A homebuyer with insufficient funds for a ten-percent down payment responds to a broker's ad under "Home for Sale"; the ad indicates that the credit worthy can move into a pricey single family residence with a small down payment. The buyer inspects the property, and decides that he would like to buy it. The seller is asking for five-percent down, and is willing to carry the balance. The five-percent down payment is called "option money," and is to be applied to the purchase price should the option be exercised. Correspondingly, the monthly payment is called "rent," and a portion of the rent is to apply to the purchase price - upon exercise of the option. Thus, except for the absence of a note, trust deed and grant deed, the terms of this so-called "lease option" have all the economic characteristics of a carry-back sale. There is an agreed-to-price, a down payment, monthly payments toward principal and interest, and a three-year due date.
After closing, the buyer incurs financial difficulties and is unable to keep up with his payments. The seller attempts to evict the buyer for non-payment of rents. The seller claims that the lease is terminated by a Three Day Notice to Pay or Quit and the buyer forfeits the right to the possession of the property and the amounts to be credited toward the purchase price. Can the seller terminate the agreement as a lease with an option and keep the buyer's money?
No! When a buyer in possession under an agreement receives credit toward the purchase of a portion or all of his payments to the seller, he has established and built up an "equity" in the property, and "ownership interest" which must be terminated by foreclosure.
What do you guys think of this? It could be a mess trying to evict someone who doesn't pay... 
if i understand that the guy has 3 days to pay or lose the option. thats not fair with 5% down payment. there must be a bigger issue than that. whats the purchase price of the home.
Yes, this could actually happen.
The design and wording of your lease and option contracts will play a huge role in the courts determination of whether it's truly a lease agreement w/an option to buy or if it's a seller financed deal w/principle and interest payments.
A lease-option deal should always have 2 separate forms: a lease contract, and an option contract.
Although many promote 'rent credits', this is the term that will probably end up considered as 'principle' payments.
This is why a good lawyer is needed to review and verify your forms/contracts. If you already know it will hold up in court before you get there, then you won't have a problem.
Roger
Can the agreement just say "rent" agreement and the deposit be just a "deposit"? Or no deposit at all.
Call it all rent. Rent deposit and rent payments. When the tenant is ready to obtain a loan, then you just let them cash you out?
Maybe just tell them they can live there as long as they pay the rent and then when they are ready to buy you will work out a deal with them. But i guess that kind of defeats the purpose of "future" ownership doesn't it? Is there any way around this problem?
It would only become a problem if the contracts weren't worded correctly to protect the landlord/seller (you). Having a good attorney review and modify your forms will greatly reduce your risks in the matter.
Roger
Does anyone have a sample contract? I was going to be a lawyer so I can interpret things pretty well. Interesting enough, I don't believe attorneys can do that much for you that you can't do yourself. A sample contract sufficeth.
First of all, never use the word deposit. Deposits are refundable. Always, use the words non-refundable option money. You are all correct in what you are saying, except certain states like OHIO recognize a lease purchase disguised as a sale when the tenat /buyer has built up more than 55% equity in the house either in making payments totaling 55% of the total value of the house, or if the rent credits have reached that limit.
The way to protect oneself is by doing a separate lease agreement and a separate option to buy agreement. When using the lease agreement, make sure that you cross off anything that days deposit. You are better off putting a ZERO in anything that says deposit. Or, you can write in "option money" but this would set a flag off that there is a separate option to purchase.
What's the difference by having 2 agreements. They will just use the one that says "lease" on it won't they? if it came to a lawsuit? There has to be a way to avoid "having" to foreclose on a "tenant with a lease to buy option"
That is the way to avoid it. A lease agreement is simply a long-term rental contract, nothing more. Don't reference an option within it at all.
An option agreement gives the buyer a vested interest in the property. The buyer usually puts down a nonrefundable downpayment for this option and must offically 'exercise' it before a certain date. Don't reference the lease agreement at all within your option agreement.
If your lease payments aren't made, then you can legally evict, no fear of any 'hidden' equity payments.
Again, an attorney will be able to draw this up for you. One that will be legal within you state, and setup to protect you.
Roger
Just a lease agreement sounds good. But in my mind if there is second agreement in place called an option agreement, that's the one the buyer will use in court isn't it. Don't use a second option agreement all? I am confused.
Word to the wise, The saavy investor always gives the tenant a copy of the lease agreement, but keeps the option agreement under lock and key until it becomes in effect. Not to mention the option agreement is nothing more than agreement that goes into effect at a particular point in time
what i would do is offer the tenant $3000 to vacate in 24 hrs.
if he's strapped for cash, he'll probably take it. just make him sign a waiver for the rest of the money.
court and legal fees will probably run that high anyway.
just my 2cents.
Excellent discussion. The tenants will no doubt bring in the 2nd agreement. However, options are not illegal, underhanded or crooked. Nor will they have anything to to with an eviction action. That is specifically why you have 2 separate agreements. If they violate the residential lease agreement, you evict under those grounds. The option agreement is a separate contract, with different contractual obligations for both parties. Technically for the tenant to bring the option into evidence, they will have to countersue. This is all well and good in theory. However, in a courtroom anything can happen. You can lose even if you are 110% in the right. That's the risk. However, it's risk/reward, and still beats flippin' burgers.
[addsig]
roiclicks,
loanwizard is RIGHT!....
....but, just remember this..
I have been doing L/O for many years..
I HAVE EVICTED anyone who does NOT PAY ME!!!
I HAVE (NEVER) LOST an EVICTION CASE in COURT!
....as always,
GoodInvesting, Rocky
Note:
In the separate lease option contract mine states that it is non-refundable and the contract agreement termitates upon termination of the lease whether it be for not meeting all parts of the lease agreement as agreed met or if the option is not exercised within a specific time of the date of the end of the lease term (before the end of the term the option must be exercised and closing date set on or within days of the date of expiration this date is specified).
This protect both parties. The leasee has to live up to his end of the bargain in full and if he does I have to live up to mine.
I believe you must give the leasee a copy of the document. My atty does, this shows your honesty and the lessee if he has any questions will have a copy that you can refer him to read. Any document that is signed by legal parties a copy must be given to the signees and the original remains with the leasor.
Remember too that the option money is non-taxable until the contract for the option is exercised or terminated. But it is taxable money if either happens.
Yes - always separate the lease contract from the option contract.