Ran My No-Quals/No Cred Chk Ad And Found A Buyer - NOW WHAT?
OK, I am venturing into my first lease option deal with the sale of my own home through lease option. I ran the ad, "No Qualifications, No Credit Check" and within 1 week found a buyer that is willing to pay $10k down which would be applied toward the purchase price and rent the property for $1500/month (no credit toward purchase) for 2 yrs. The people seem nice, but it just feels weird not checking income, credit or anything. I guess the nonrefundable $10k is really my safety net. I plan to meet with a lawyer this week to draw up the contract. Any suggestions on anything else I should be doing to cover myself? This just seems to easy to be true and I don't want to get screwed.
Make sure that you get a lawyer that specializes in real estate and is actually good at what they do. If you do that, then they should be able to draw up a lease and option agreement that will protect you and still be fair to the tenant as well.
Side note: Personally, I'd require that the tenants have and maintain a contents policy (renters ins) and a liability policy (my min is $300K). This protects their belongings and it puts a liability policy in front of yours should anybody decide to slip and fall on the property.
Roger
Does applying for "renters insurance" require my tenants to be qualified or have a credit check? Just curious how that would work since I am not requiring the qualifying/credit check myself.
Also, this was my residence, so is there anything I need to do with my mortgage company or insurance company? Is there anything illegal about not notifying them about me renting the property instead of residing in it? Will it cause problems if I do notify them? How is this stuff typically handled?
Thanks!
I would make sure your lease option agreement includes:
waiver of notice
bad check and late fee policy
legal fees for eviction process
maintenance repairs
An attorney should be able to cover everything for your state. There are some fomr on the "freebie" section of this website that may give you some guidance/ideas, too.
As for insurance: You will no longer need your homeowners policy to cover your personal property in the dwelling. Left your carrier know it is rental. You will want to have teh building covered, of course. They can quote you on that. YOu may even be able to attach it to the policy on your new home. My insurance allows 3 rental attached to my primary.
Anyway, then let the tenants know that your insurance does not cover their personal property, and you would recommend a renters policy. It is up to them to get it or not. You have disclosed that you are not responsible for their personal property. By the way, their is usually a paragraph about this in the lease agreement, too.
Hope that helps a little.
Good Luck!
Will a switch from homeowner's insurance to a rental property insurance policy trigger notification to my mortgage company? My mortgage company is under the assumption that this is my primary residence.
I'm with Raj about requiring a renters policy.
Also, a Waiver of Notice provision is unenforcable. Notice is a requirement of the law, you cannot waive it. I find it annoying when I find such provisions in contracts and find people who put them in there very susupicious.
As long as you actually lived in the property before it became a rental, stop worrying about the mortgage company. They won't care that you changed your insurance policy from a homeowner's to a landlord/dwelling. All they will care about is whether or not the insurance is covering their colateral.
As far as the waiver of notice, you can include that if you wish in your lease, but as CK said, in practically all states, it is unenforceable. So if you have it in your contract and it comes down to the notice, then I'd still send them out.
As far as the renter's insurance goes, it would probably depend on the actual insurance company whether the require a credit check or not, but in my experience, they do not. As for me though, I require that they get contents and liability coverage AND that they pay it for one year at a time (in advance). Since that is the life of the policy, there is no need to do a credit check. You might want to call around to some companies yourself and then present best ones to your buyers. Where I'm located, I've found that best contents/liability packages to run $150-200 per year for $25K in contents and $300K in liability. However, some of my tenants insist on going with their own companies. Nationwide for example, charges $275-$350 for the same coverage.
Roger
It's unlikely your buyers have great credit--they did notice your ad, right?--and, speaking from my own experience, I get anxious about that. If it makes you feel better, try to find online checks on your buyers for bankruptcy and criminal records. I've found free online ones for MN and bookmarked both as "favorites." I use them now, perhaps too obsessively, so be warned. You could do the same, but with a nice cushion like $10k, why bother? At least ask your atty. how much it would cost (both time and $$) to get a non--payer out. Then do the numbers, and included opportunity costs (of losing X months rent, etc.)
Switching insurance from owner to renter may present surprises. I discovered my insurance company says renters are not allowed to use woodstoves if they are present--even if they are "approved" ones--and many renters like to be able to use them here.
Can someone explain what a Waiver of Notice is? I'm unfamiliar with this term. Thanks!
"waiver of notice" if you don't know what it means, then you probably don't have to worry about it because you want try to do it.
However, in a nut shell, it is when you get the tenant to sign a paper (the waiver) that says that you do not have to give them the standard notice period for eviction. This period is different for each state and different for each offense.
Roger
Since you are the Owner/Seller, make sure your Contract states that if they record a Memorandum it will render their Option null and void and of no legal force and effect. Also, make sure it refers to you as the Optionor (not Seller) and to the Tenant as the Optionee (not Buyer). Make certain you use two separate Agreements (Lease and Option). Also, the Option should end on the date listed and state that it cannot be extended.
LOK,
None of that works if he is selling via a land contract/contract for deed.
Roger
LOK,
Why is using two seperate agreements better than using a single lease-option agreement?
-Tim
You want to avoid the equitable interest issue. If they stop paying, evict with the Lease. The Option should be contingent upon the Lease. The Lease should not mention the Option at all.
[addsig]
A lease-option agreement is two seperate transactions. the lease and the option . therefore you should have two seperate sets of documents, the lease agreement which would spell out all the lease terms, monthly payments insurance requirements pets etc. any problems you can foresee ,cover them now so they aren,t bigger problems later.
and the option agreement which gives them the option to purchase at a later date. I would treat the 10k down as a non-refundable option fee not a "downpayment"and make sure the "buyers" understand this.
also, if needed , dont forget your disclousure forms. here in ohio we have seperate lead based paint forms for sales (the option) and leases. 8-)
If the lease is not supposed to refer to the option, then where do you specify any rent credits that you are offering the T/B? (If you choose to do so) Or is that just a verbal understanding? (which doesn't sound right...)
Thanks!
posherov
In the option contract.
Yes, in the Option. Roger, I'm no expert with CFD, but I know some state they are nonrecordable. That always seemed very fishy to me.