Major Pitfalls!

What are some of the major pitfalls of L/O's and than subleasing to a third party?

Comments(16)

  • arytkatz17th May, 2004

    GS:
    Not having done one, take this as you will. From my understanding, if you lease/option a house, the original seller still has title to the house.
    Here's the danger in this: you go ahead and put your own lease/optioner or renter in the house. The original seller gets into financial trouble and has a bunch of liens attached to the house (new mortgages, non-payment of taxes, etc.). What happens if orig. seller gets into so much trouble, the house is foreclosed on? Where does that leave you and your tenant/buyer? What happens when you go to close on your option and find out there's more $ owed than you originally signed up for? How do you get clear title to the property with those extra liens on it without paying them off (or shorting them, or forebearing them or whatever--in any case a major headache)?
    Your not having control of the property is the biggest pitfall of lease/optioning, IMHO.
    I'm sure other, more seasoned, L/O'ers will chime in and give you some good advice.
    Andy

  • gsrgirlie17th May, 2004

    thanks arytkatz, I guess the most important question is how do you get around these obstacles

  • jeff1200218th May, 2004

    You use a different strategy like Sub2 when you buy! Lease option is a good strategy especially when you are the one selling.
    Jeff

  • miraclehomes18th May, 2004

    Try to use sub2, like we had talked about.

  • Argus417th June, 2004

    You can always put the property in land trust to avoid leins and anything else that would cloud the title.

  • jeff1200218th June, 2004

    argus4,
    If you do not own the property, you can't put it into a land trust. It involves transfer of title.

  • classimg18th June, 2004

    Unless your contract signed by the owner, offers a provision to assign your agreed interests in the contract you are in a "pickle" to sell without involvement of the owner.

    Correct contracts unlock the future. What was your exit strategy when you signed the lease option in the first place?

    Eric & Rosa
    [addsig]

  • kenmax18th June, 2004

    a pitfall to l/o a property is that the renter/owner can "walk" at any time. you have to been prepared to take the home back and usually it will be in "rented" shape and need alot of fixin' like painting, carpet, cleaning, ect.......kenmax

  • Argus419th June, 2004

    Even if you don't own the property, you can still get the owner to put it into a land trust so that they do not mess anything up and have it attached to the property. You don't have to own it to ensure your best interests are covered.

  • active_re_investor19th June, 2004

    Are we discussing L/O's where the option is recorded? If so, the date of recording for the option will set its priority minus future property tax liens. If other liens (refinances, IRS tax liens, etc) are recorded they will be after the option to the option has priority.

    As to the wording of the option you can put in specific requirements that the owner can not refinance or place any other voluntary liens on the property. Again, with a recorded option the lender will refuse to refinance and/or the title insurance company will flag the presence of the option and how it has priority.

    Options that are not recorded are definitely at risk. I believe that in some states an option that is not recorded is not legally binding so could not be exercised.

    None of the above implies that the putting the property in a trust is a poor idea. It might even be better though it likely means that there has been a sale and the seller might not want a sale to be effective until much later (tax planning being one good reason).

    John
    [addsig]

  • JohnLocke19th June, 2004

    Argus4

    Glad to meet you.

    So let me give you just two of many senario's regarding what can happen when a person places their property in a land trust other than for anonymity reasons.

    Your seller that you Leased Optioned from files bankruptcy. He is required to list his debts and assets for the court. Does he list the property that is in the Land Trust?

    Your seller that you Leased Optioned from has an IRS lein placed on him. When he fills out the govenments paperwork listing his assets and debts does he list the property in the Land Trust?

    Now I know the answers, however maybe you have a way to get around fraud when it comes to the Feds since you feel that Land Trust is a catch all for avoiding leins and encumbrances.

    I know if the seller deeded the property to me what the answer is. He does not list the property because he no longer owns it.

    John $Cash$ Locke

  • JohnLocke19th June, 2004

    John,

    Both of us have been around the block enough times to know you can put any wording you want in the Lease Option contract.

    However if the L/O's seller takes a HELOC out on the property even though the contract specify's otherwise, then the person who L/O'd the property would have to sue for Specific Performance, which will cost a dime or two. Now it becomes a matter of how much is someone willing to shell out of their pocket to complete the deal.

    Now the person who the property was sold to expects the property to be sold to them on the terms they L/O'd on. So it is the responsibility of the person who sold them the property to make sure this is accomplished even if they spend far more on a law suit than what they will make on the property. Plus the court system is a long drawn out affair when filing a law suit.

    Good point about recording the option, I don't really know if most courses tell them to record it or not. Chances are if the seller files bankruptcy it will become a mute point anyway.

    John $Cash$ Locke[ Edited by JohnLocke on Date 06/19/2004 ]

  • fearnsa19th June, 2004

    There's something called a "Performance Mortgage" for which a sample can be found on a web search. Peter and David of Lease/Option success in CA somewhere, and William Bronchick, Esq. recommend a Performance Mortgage to avoid L?O problems.


    My method is different. I have successfully used a creation of mine once, a phrase that I'll pull from memory, since the contract is not in front of me. The situation was an option for land. I love it, and it seems to be as specific as one can get in the way of protection. Again it's from memory, but you'll get the point. I have the usual remedies for buyer and seller, regarding failures by either side (sue for specific performance, retain option money, pay legal costs, etc.) in the contract. This gem, which may not get accepted every time, did get accepted on its first use in April 2004, with a ten-year Option.

    "Default by Seller; Remedies of Purchaser. Seller pledges Land and Improvements as collateral for Option Fee from Purchaser, excluding legal fees and any other fees, if required. In the event Seller fails to close the sale of the Land and Improvements pursuant to the terms and provisions of this Agreement and/or under the Contract, Purchaser shall, in addition to receipt of Land and Improvements, be entitled to sue for specific performance, or terminate such Contract and sue for money damages.
    Default by Seller is defined as borrowing money secured by described optioned Land and Improvements, encumbering the optioned Land and Improvements with liens subsequent to the date of this contract, or failure to follow through with sale subsequent to receiving option fee from Purchaser."

    So the crux of the matter is the land which I optioned is the collateral for good behavior and performance by the seller. "Specific performance" is an ADDITIONAL violation I could sue for. Of course I'm hoping, as we all do with contract language, that the language is clear/strong enough that the Seller won't want to part with the land for only my Option money.

    Regards,
    Alan

  • JohnLocke19th June, 2004

    fearnsa,

    Alan are you saying that if the seller files bankruptcy, that your document will survive the bankruptcy in Federal Court and become enforceable?

    John $Cash$ Locke

  • fearnsa20th June, 2004

    I certainly cannot say that about bankrupcy, John. My option fee needs to stay reasonably small instead of overtly big, in either case. A large option fee, while not only unattractive, is too much of a problem elsewhere. I check out sellers as much as they check out me. However, Sub-To purchasing would avoid all of the concern, and the seller quality would not matter--a pro for Sub-To buying.

    Alan

  • fearnsa20th June, 2004

    I'm also not saying my "collateral" won't survive. Its hard to imagine it getting into first position (it won't). The courts, however, may see me as a legitimate party in this somehow, such as first crack at settlement, of course I really do not know.

    Again, Sub-To avoids all of this. My local sellers like leasing, and are never highly motivated--no foreclosure looming, etc., in my discoveries over 9 months. Perhaps I need to aim for preforclosures in order to have more Sub-To chances; my form has been poor during explanation. Sellers jump all over the Lease Option. I start with Sub-To approach, settle on the merits, and pause. Made some cats nervous and we never got to the rest. I keep working it out though. That's part of my learning.

    Alan

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