Title search, when? ....My first lease option....
I just did my first lease option deal. I am currently looking for a buyer.
When should I do a title search?
When I sell it?
Where do I record the transaction at?
And if I record it will I be in risk of the existing due on sale clause?
And what all will recording the transaction protect me from?
Thanks
jwadams,
Glad to meet you.
Well you went out and did a deal without taking into consideration of what the consequences are with out the proper paperwork or how to handle the transaction.
You did no due deligence, like the first thing you do is a title search, what happens if there are liens and encumbrances on the property?
Next a Lease/Option deal has nothing to do with recording the deed.
I certainly hope that you can straighten out this deal before this is your last deal.
Welcome on board this board, I know I am being tough on you, but this should serve as a warning to others, the questions you are asking should have been resolved before you ever did this deal.
John $Cash$ Locke
Thanks for your reply, John.
My deal is subject to me finding a sublet.
I will have no money invested in this project.
I was not speeking of recording the deed, just recording the transaction so if the original owners were to try to get a second morgage on the property, it would be none that there is a contract on it.
Thanks,
jwadams,
Sorry about that one, yes you did say transaction.
I just did not want to see you get in over your head, there are many things that can pop up in a lease option deal, that afford you or the person you are leasing optioning to no protection.
You can cloud the title by recording the transaction, this will not trigger the Due on Sale clause if the option period is less than 3 years. However this does not protect you from certain things happening like the Seller filing Bankruptcy or an IRS lein attaching to the Seller then the property.
When you are sub leasing with an option to purchase the property you are responsible to deliver clean title to the property. If you feel confident you are able to do this then go for it.
When we speak of Risks vs Rewards investing, you think about how much you will make off the deal vs how much the risks will be.
We must look at ourselves as professionals, hold our ethics and credibilty to the highest standards. Or in laymans terms if we can't take the heat (or protect ourselves our sellers and our buyers, with the proper paperwork more importantly) then don't go in the kitchen.
John $Cash$ Locke
John has some great advice, so I won't repeat it.
I would just add that I like to record a "memorandum of option" rather than the lease option contract, since I don't want the world to see what a great deal I got! Although it would be prudent to do a title search and possibly obtain title insurance, many investors forgo those extra costs and take on more of the risk. Remember, if you are doing a sandwich lease option, if your tenant exercises the option you are OBLIGATED to deliver marketable title. If you can't you could be liable for damages which could mean yo have to return all of the option money, any other consideration paid on the option, and the equity in the property in the amount of the option price (strike price) and the FMV of the property.
You might be saying, "but the owner is liable to me, so I can seek recourse against him/her." That is true, but as John points out, if the seller has filed bankruptcy, you might not get anything from him/her. Also, what if you can't find the seller when you try to exercise the option (because your tenant has exercised his/her option)? Quite the predicament.
I usually try to get the owner to deed the property to a trust and then designate the owner and an attorney, closing agent, or bank trust officer as the trustee of the trust. If the contract is drawn up properly, the trustee would be compelled to transfer the beneficial interest in the trust (which owns the real estate) or the actual real estate on the exercise of the option. This is a much better way of dealing with lease options, since if the owner dies, becomes bankrupt or can't be found, it could take you years to get title to your tenant.
Taxjunkie
taxjunkie,
You have given IMHO sound advice for those who want to pursue the Lease/Option method of investing that I have seen to date.
KUDO's,
John $Cash$ Locke