Protection When Doing A Lease Option

Hey folks,

How can I protect myself on a lease option should the seller incur a judgement or lien against himself which attaches to the property during the term of the lease? Could I ask him when we set up the agreement initially to put the house into a Land Trust?

Any ideas would be appreciatedsmile

JohnM

Comments(19)

  • rajwarrior4th August, 2003

    You really can't do anything to 'protect' yourself, or rather your deal, in this situation.

    If you're ''buying'' thru a L/O, the property is still the owner's, not yours. So if he doesn't pay his bills, has judgements taken out, or files BK, you're pretty much out of a deal.

    This is just one of the risks with this method of investing.

    Roger

  • AKlein7th August, 2003

    Quote:
    On 2003-08-04 21:03, JohnMP wrote:

    How can I protect myself on a lease option should the seller incur a judgement or lien against himself which attaches to the property during the term of the lease?

    Learn about performance mortgages. (They also keep you from having to do a double closing with an unseasoned loan.)

  • Stockpro997th August, 2003

    I would ask, what is the problem here? You say what happens if he gets a "judgement during the term of the lease". Who cares? he is only leasing and has an unexercised option to buy. IF he is leasing as stated then title has not passed and no liens can be attached to it. You still have the deed.
    [addsig]

  • tdelo567th August, 2003

    Does Johnmp have the deed yet or are you leasing with the option of buying?
    THat makes a big difference there..

  • roiclicks7th August, 2003

    Can anyone write a brief list of the top 10 things that can go wrong when you lease option your property to a potential buyer?
    Or a sample of the main protective clauses you put in your lease/option contract? [ Edited by roiclicks on Date 08/07/2003 ]

  • JohnMP7th August, 2003

    My question on protection when doing a lease option concerns how will I protect myself in the following scenario:

    1. I lease option a house from a seller.

    2. I then sublease it with an option to purchase to my buyer.

    3. Before my buyer has a chance to exercise their option, the person who l/o'd the house to me goes and gets a lien or judgement against him that attaches to the property.

    In this case, my tenant-buyer would not be able to exercise their option to purchase the house because I can't provide them with clear title. They would then likely sue me for breach of contract.

    Therefore, how can I protect myself from this type of situation? Have the seller put the house in a land trust when I l/o it from him?

  • edickens827th August, 2003

    John:

    The land trust seems to be the solution. But I would be interested in finding out if anyone has been successful without the use of the land trust. A land trust just means more money! New investors are going to go straight for the lease option to keep down out of pocket costs.

    There are risks in investing, but my reputation is the only thing that I am not willing to risk. And being sued for not being able to follow through with the orders of the contract would do much damage.

    Also, while we are on this topic I have another question:

    What will stop your seller from taking your money and not make the payments on his or her mortgage?

    Would I send the checks to the seller but have them made out to the bank?

    Thanks in Advance,
    Ervan

  • pbodys7th August, 2003

    Hey JohnMP,

    How can they sue you when you don't own the house.....when you sublet to a T/B, isn't it based on YOU owning the house? (exercising your option to purchase it "first" then selling it to your T/B?).

    In my Lease contracts, my lawyer puts in a clause that the Option to purchase is based on NO additional encumbrances being placed on the prop.....I inturn place the same clause in the T/Bs contract.

    Also, if you are unable to exercise your Option at the end of the term, you will not be held liable and that the T/B is free to purchase the prop. from the original owners/sellers at an agreed upon price.

    You can also have them sign a Promisory note for say...$2k paid to you at the end of the term if you cannot obtain a mortgage (in exhange for lowering the purchase price in that amt.)

    example:
    You ask for $192k for the prop. You tell them if you cannot purchase the prop. will they be willing to extend to you $2000 at closing for helping them get into the prop. in the beginning.... in exhange for knocking off $3000 from the purchase price.

    It's all negotiable.
    Hope this helps,
    Clif

  • pbodys7th August, 2003

    To Ervan,
    Quote:
    Also, while we are on this topic I have another question:

    What will stop your seller from taking your money and not make the payments on his or her mortgage?

    Would I send the checks to the seller but have them made out to the bank?

    The answer is:
    You never send the owners/sellers any $, you have a third party pay the mortgage....a loan servicing company or escrow company. that way you'll get credit for the payments.

    They will handle all the paperwork for a nominal fee per check per month.

    Hope this helps,
    Clif

  • melvin5022nd August, 2003

    If a seller defaults on selling you the property for whatever reason what happens to your tenant buyer and their non-refundable option deposit? I would assume that you give the deposit and any rent credits back to the tenant.

  • JohnMP23rd August, 2003

    Thanks so much for the great responses, folkssmile

    JohnM

  • locke26th October, 2003

    Couldn't you put a clause in your original l/o contract with the seller that should his title become clouded, you as buyer are entitled to full deposit refund + penalties?Would this work?

  • mcl819030th October, 2003

    Step 1 : get a good lawyer
    Step 2 : have the lawyer put in all that special wording about non-performance, and spirit of the agreement and unlimited responsibility for damages
    Step 3 : record your L/O to cloud the title, making it very difficult for the original sellers issues to become yours.

  • Biff30th October, 2003

    Put the property into a Land Trust. Costs me $ 6.00 to file at County. Go to a Tittle Company and have them act as Trustee. Costs around $ 30 a month.
    If you are taking control of property have orig. owner assign you 90 % benef. intrest. You than go out and locate a Res. Benef. to lease on triple net.

  • gmay8th December, 2003

    How about putting a performance trust deed on the property? That would place your position in front of any future liens on the property. Assuming the seller has enough equity in the property, when your tenant buyer exercises their option to purchase the liens will be paid off out of the seller’s equity. There needs to be a clause in your lease option agreement with the seller that states no additional encumbrances will be placed on the property and in the event a lien is placed on the property that lien will be paid out of the seller’s equity at the time the property is purchased by your tenant buyer.

  • JohnMerchant8th December, 2003

    mcl8190

    Posted: 09:39 on 10-30-2003
    --------------------------------------------------------------------------------
    Step 3 : record your L/O to cloud the title, making it very difficult for the original sellers issues to become yours.

    Responding to Step 3, this would surely prevent any subsequent liening the RE, but not prior recorded liens, so make sure you KNOW the title picture before taking the RE sub-to.

    And that L would have to be Notary acknowledged to make it recordable...in fact, in my state of WA, if a L is NOT notarized, it is voidable at option of the owner.

    I have personally bought RE with alleged LONG term L thereon, and immediately dispossessed & evicted the overly smug tenant who just thought she had a multi-year L for a low rental rate!

    Tenant had craftily drafted a multi-year L with ridiculously low rental, but neglected having it notarized when signed, to her regret.

    When she got my 30 Day Quit notice, she immed. fired off a mean letter to me that she had a L, etc., but she was gone by end of that 30 days, so apparently her lawyer agreed with my analysis.

  • JohnMerchant8th December, 2003

    mcl8190

    Posted: 09:39 on 10-30-2003
    --------------------------------------------------------------------------------
    Step 3 : record your L/O to cloud the title, making it very difficult for the original sellers issues to become yours.

    Responding to Step 3, this would surely prevent any subsequent liening the RE, but not prior recorded liens, so make sure you KNOW the title picture before taking the RE sub-to.

    And that L would have to be Notary acknowledged to make it recordable...in fact, in my state of WA, if a L is NOT notarized, it is voidable at option of the owner.

    I have personally bought RE with alleged LONG term L thereon, and immediately dispossessed & evicted the overly smug tenant who just thought she had a multi-year L for a low rental rate!

    Tenant had craftily drafted a multi-year L with ridiculously low rental, but neglected having it notarized when signed, to her regret.

    When she got my 30 Day Quit notice, she immed. fired off a mean letter to me that she had a L, etc., but she was gone by end of that 30 days, so apparently her lawyer agreed with my analysis.

  • JayLevin8th December, 2003

    JohnMp

    It's not so bad to take title subject to as long as you’re the only person who can get hurt; but if I understand you correctly, you are considering buying a property subject to existing financing and then renting or leasing it with an option.

    I strongly suggest you not do that.

    You have suggested some of the reasons. The broader reason: the type of person who would take your deal is unsophisticated and does not recognize the trap you are putting them into. Merely getting them to sign a disclosure does not solve the problem. California feels strongly enough about this issue that if the deal goes bad, you go to criminal court not civil court, and can spend a year in the slammer. Most reputable real estate investors consider people who make deals like that, one step below pickpockets and carny men. It takes a very sophisticated, experienced and well-funded person to do deals like this. You need to be financially strong enough to make sure your customer does not get hurt.

  • CaseyinBoise8th December, 2003

    Can't you have it incorporated into the contract that YOU, the "buyer" has the right to pay any lenders and/or creditors directly?

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