On A Lease Purchase, What If Sellers Don't Make Payments?
Let's say I bought from a motivated seller on a lease purchase option. I make payments on their home for 6 years, with an option to cash them out. I find a tenant-buyer that makes payments to me. Now, if I'm making payments to the seller, what if the seller for whatever reason doesn't make those payments to the original mortgage? The house gets foreclosed on and then...
You make payments directly to the loan holder with the account number of the loan on the check...
Ok that sounds good. But I have another question. What if the sellers get a judgement or lien against the property while you have a tenat buyer in place? The tenant buyers cannot purchase the home with a cloud on the title, essential the property is dead in the water.
Ok I found an answer doing a search, basically stating that you put clauses into the contracts about this very thing. However, in the thread an interesting question was brought up about the option money and rent credits. If the original seller obtains liends and cannot produce a marketable title, and the tenant buyers are not able to buy-the whole deal falls through, I'm not liable...but what happens to their option money? Is this truly non-refundable or do I have to return it?
Anytime that you do not OWN the property then you run this risk. However, you can protect against it a bit.
Do not pay the seller. Have a third party company receive the payments from your TB and then they cut checks to everyone required. It would be a good idea to place some or all of your option money into this account with the servicing company. That way if late payments are made by your TB then the loan payments are still on time.
Get all documents required for the sale signed and placed in escrow. This way you don't need the owner present to complete the purchase. Just deliver the purchase money to the escrow agent.
Get a performance mortgage signed and recorded immediately so that any other liens would fall in behind yours.
Record your memorandum of option also.
Just want to clarify a point here. You said that if the deal would fall thru (due to seller/owner problems), that you wouldn't be liable. That statement is plain out wrong my friend. Failure to produce a clear title to your tenant/buyer WILL make you liable, period, regardless of any terms, etc. within your contract.
This, BTW, is the main problem with ''buying'' thru L/O. You don't have control of the property. In the situation that you presented, you would either have to present a clear title or refund to the tenant the option payment and rent amounts over and above fair market rents.
Roger
Thanks for the replies. Quick question, what is a performance mortgage exactly?
It is a mortgage that guarantees their performance in regards to the LO agreement. If they default on the agreement then you foreclose on the property.