Lease-Options Illegal?
It's funny how you do something so long and then read something and then you start doubting yourself...lol
Case and point, I was surfing the web and came across John T. Reed's website. Not a bad site, harsh to some REI people, but good info to read to have another person's view. Anyway, he has a part on the site where he talks about lease-options as such:
"Lease options are explicitly named in numerous laws and legal documents as triggering events. They trigger almost all mortgage due-on-sale clauses. They trigger reassessment for property-tax purposes in California, thereby wiping out the protection California homeowners normally get from Proposition 13.
Another problem is the legal doctrine of substance over form. It is possible to do a lease option that is clean. But the various gurus advocate doing lease options in a way that arguably triggers the doctrine of substance over form.
That doctrine says that what you call something does not necessarily determine what the law will regard it to be. Calling a lease option a lease option does not mean the court will treat it as a lease option. In fact, I believe they will treat most guru-designed lease options as land-contract sales in substance. The legal implications of such a determination are amazing in their number and seriousness. You could have a tax-free exchange invalidated. You may find that you are unable to evict the tenant. IRS may say that all your lease options were installment sales and that you must pay overdue tax and penalties on them, tax that will be inflated by the typically inflated option prices."
Interesting huh? Now, I realize that at the end of the article he talks about his special report you can buy for $29 that will explain everything 
The question is, even though we all do these and some of us have done them for quite some time...is there any truth to this information he talked about? Just because we all have done things, doesn't mean they might have been done wrong or illegal and we didn't know.
Like I said, normally I don't listen to stuff like this, but it kinda made me think and wanted to ask others out there.
Man, I hate when I come across stuff that makes me think 
Best Regards,
[addsig]
The way to make sure your L/O contract is legal is to work with a good local RE www.Attorney.This can protect you from problems with the IRS and banks.You have to remember on the due on sales clause banks are in business to lend money which makes money for their stockholders.When banks foreclose on houses this limits their ability to loan www.money.Most do not care who is making the payment as long as it is being made.
SolutionsKid,
Unfortunately, you read something "into" the JTR essay that just is not there. Nowhere in what you posted, does JTR say a lease option is illegal. Perhaps his rhetoric scared you so much, you reached that conclusion.
The answer is lease/options are perfectly legal. Do they trigger the Due On Sale Clause, most often they do. Is this illegal -- NO. Will the lender exercise its option to accelerate the loan in this event, maybe, but most likely not.
Can a lease option be so poorly designed that the IRS will construe it as a disguised sale -- YES. Does this make the "sale" illegal -- NO, it just means you and your buyer have some amended tax returns to file and you may have some penalties for back taxes to pay as well.
"Tax that will be inflated by the typically inflated option prices" just says that your taxable profit is based on your contract sale price, just as it would be anyway when your tenant buyer exercises his option. Paying more money to the IRS in taxes, just means that you made more money to begin with. If making more money scares you, then give me all your deals. I will gladly pay 10 times more taxes than I paid last year, because that will likely mean that I made 50 times more money.
"They trigger reassessment for property-tax purposes in California, thereby wiping out the protection California homeowners normally get from Proposition 13." Maybe true, I am not in a position to comment otherwise. If placing a property in a revocable trust triggers a property tax reassessment in CA, the landlord/seller can factor that into his lease/option transaction. If it does not happen at the beginning of the lease term, the reassessment is going to happen anyway when the tenant-buyer exercises his option.
However, since you are in OH, you probably do not have this concern in the first place.
If you are still doubtful, spend the $29 for JTR's special report. If it gives you peace of mind, may be worth the money to know that you were right all along.[ Edited by DaveT on Date 01/19/2004 ]
Probably the late night Christmas bought egg-nog that brought this on...that and the Godzilla vs. Megalon video I rented, but thanks for clarifying that Dave. Every now and then just need a smack in the butt...
Thanks,
[addsig]