Bogus Lease Option? - Posted by Jeff(TX)

Posted by randy on July 05, 2001 at 07:04:02:

are any one of you concerned witw giving away the tax advandages when you do cfd /as to l/o ?

Bogus Lease Option? - Posted by Jeff(TX)

Posted by Jeff(TX) on July 03, 2001 at 16:07:53:

I was reading on Bill Gatten’s web site that Lease/Options are actually an owner-carry sale.

The article says that if a tenant claimed to have equitable interest in the property that a judge would reclassify the L/O as a Land Contract. Therefore the L/O is not a hybrid as we would like to think.

What are your experiences with L/Os? Have any of your tenants claimed the equitible interest argument? If so what did the judge say?

I am about to sign up a L/O in order to do a sandwich deal. Do I really need to worry about my tenant/buyer claiming an equitible interest?

Any comments would be appreciated.


Than’s a scare tactic … - Posted by Jim

Posted by Jim on July 04, 2001 at 18:02:46:

… so you’ll buy the Pacturst, shameful sales angle. That site is definitely NOT the place to learn about l/o.

This same question was answered a while back by Bronchick, since it’s gone from the board I’ll retype it:

“The article greatly exaggerates the dangers of re-classification by citing old cases that have nothing to do with the formula we use. A short term lease/option with a 5% option consideration is virtually NEVER re-classified as a land contract.”

There were several posts in the thread?Bronchick goes on to site case law to support his position.

I’d be more concerned that a Pactrust might be reclassified as partnership, or that you might have to foreclose on a resident beneficiary (they do carry the burdens and benefits of ownership since they have tax benefits). Also, Pactrust hasn?t been tested in court. Lease/option has been tested, many times. Personally, I?d rather use an instrument that has stood up under legal scrutiny, not something that is merely thought to be solid by a non-attorney that stands to profit from the sale of his product.

Ever wonder why Pactrust isn?t carried on this site? My understanding is that it was considered but didn?t stand up to creonline standards.

I almost bought into the ?chicken little?the sky is falling? sales tactic until I did a little checking around, you might want to do the same before you fear the sky crashing down.


Re: Bogus Lease Option? - Posted by Bud Branstetter

Posted by Bud Branstetter on July 04, 2001 at 24:00:37:

Other investors in the DFW area that have used the separate lease from the option have not had a problem in JP court. Oh, they claim all sorts of things but I have not heard of one winning yet. That is not to say that the more option money they put up the more they would fight you.

With the new CFD laws you certainly want to refrain from doing CFDs in Texas. I have been using the Pactrust concept for about a year now. I set up my own and prefer it over other methods. One is for the protection against problems. Another is because in the nicer houses you can sell that ownership interest for more than what you can get with a L/O. David Alexander commented that he is rethinking his documentation in light of the new CFD laws. I may win him over yet. You can set up a lease and still allow them to deduct the taxes and interest without a sale.

Re: Bogus Lease Option? - Posted by JohnBoy

Posted by JohnBoy on July 03, 2001 at 16:38:41:

There is always a risk of a judge forcing you to foreclose vs. evict a tenant if they were claiming equitable interest. This is the reason for using separate contracts. One for just the lease and the other for just the option.

Also, check your state laws. For example, in IL. when selling on a Contract for Deed we can evict the buyer as a tenant IF they have less than 20% equity AND the contact is for less than 5 years. So if I were to sell on contract with the contract being a term of 5 years or more AND the buyer was to have 20% or more in equity then I would have to foreclose to get the property back.

Now, a L/O isn’t a contract for deed, but I would guess that in order for a judge to call the L/O a sale whereby forcing a foreclosure that the terms of the L/O would have to at least meet the same requirements as a contract for deed would in determining whether to force a foreclosure or not.

Check with an attorney in your state and find out what the laws are pertaining to contract for deeds and run this by him about selling on a L/O.

The key is to limit your risk. Use separate contracts and keep them on a short term basis. One to two year terms and you should be OK. The longer the term you give the tenant/buyer the more risk you take of something like this being a possibility.

Re: Bogus Lease Option? - Posted by John

Posted by John on July 03, 2001 at 16:17:00:

would having your t/b sign 2 DIFFERENT contracts help any?. One for the rent (with no credit)the other for the option. That way I don’t see how an equitable interest is being acquired in the property…what they are paying is RENT. If you must credit part of the payments to the down payment maybe a rent credit situation would work (% of RENT credited only if the option is exercised). Not too sure though…


Talk about scare tactics - Posted by Bud Branstetter

Posted by Bud Branstetter on July 04, 2001 at 23:32:57:

Sure the article is old and extreme but it does point out the problems of improperly drawn lease with option contracts or judges that do not know the law.

But then you go on to attack something I think you know very little about. You insinuate that it could be reclaissified as a partnership, maybe a HOA or a security device. A land trust could if not properly done. That is why you buy the proper documentation-to avoid those problems.

What legal scrutiny has a lease option stood up to. An FED at a JP level? If you knew Pactrusts you would know it also gives people possession with an equivalent contract to a lease. Unless Bill Gatten is fibbing they have had to evict and or cancel a number of contract. Has anyone been successful at overturning it? The provision that has never been tested is if the lender has a right to classify it as a violation of the DOS. Should you use material from an attorney that proglumates beating the DOS with a clear violation of the clause? That is as ridiculous as your argument. Maybe it has never been challenged because the lenders attorneys that have considered it felt they might lose. Maybe it is the same as with the subject to and long term L/O’s- at this point they just don’t care.

What has passed muster is that the IRS will allow the deduction on their personal taxes. And that is an advantage no L/O can get you.

You also insinuate that it is not carried on CREOL for a dumb reason. It is mainly a service not a product. They have had is banner here for numerous stretch. Would you please quote the source of your understanding?

I’m not sure why you do not like the product or service but I think you are misinformed.

There are many people across the country doing subject to’s and L/O’s. Then you come across a new law like they recently enacted here in Texas. Try doing a contract for deed now. Your choices are L/O or a PACtrust. By using the protections and the benefits I feel I can get more down and more per month than a L/O and be a lot safer from bankruptcies, divorces etc. It has been that long that several posts where about the problems when a seller declared bankruptcy or had some other legal problem.

Re: Bogus Lease Option? - Posted by Jeff(TX)

Posted by Jeff(TX) on July 04, 2001 at 12:04:38:

Do you recommend Bill Gatten’s PacTrust course? You say you set up your own. Does yours differ from Gatten’s PacTrust? Or were you just saying that you prefer the PacTrust to other investing methods?

Also, on a side note, Is a Performance Mortgage enforcable in Texas? Bronchick recommends using them with a L/O to cloud title and gain an insurable interest in the property.


Re: Bogus Lease Option? - Posted by Jeff(TX)

Posted by Jeff(TX) on July 03, 2001 at 20:48:23:

As far as CFD in Texas, you have to foreclose after a buyer has 40% equity or has made 48 payments. I’m familiar with the law because they just changed it. Actually the change in the law is why I started pursuing L/O as my preferred method of selling. (I haven’t done any deals yet, but before the new law I was trying get the deed and then sell on CFD.)

I started wondering, If a judge decided to reclassify the L/O as a CFD, would I have to follow all of the laws regarding CFD in order for the L/O to be valid? For instance, In order for the CFD to valid, it must be recorded within 30 days. If I don’t record the L/O, could he void the contract? At this point there may be no way to tell since the law is new. Actually, the new CFD law is not completely new. Certain areas of Texas (mainly around the border) have had the strict CFD laws for awhile.

I was just hoping that someone could share their experiences with tenants claiming equitable interest. It does seem that having two seperate contracts would help. I have Bronchick’s forms, which seem very thorough.


Re: Bogus Lease Option? - Posted by Mike Schmidt (IL)

Posted by Mike Schmidt (IL) on July 03, 2001 at 18:58:59:

Jim (IL) soon to be Jim (FL) just had a case like this come up that went to court. Jim does a seperate lease and option. The judge ruled in his favor. I dont recall all the specifics but this issue is why you have a lease and a option and take the consideration money with the option and apply a small portion to the lease as a security deposit. As said by others check with your state on the guidlines. Even still I guess it all comes down to the judge and how he see’s things.

Re: Bogus Lease Option? - Posted by Bud Branstetter

Posted by Bud Branstetter on July 04, 2001 at 23:55:46:


Read the response to Jim above to answer the question as to how I do things. I purchased his documentation but use my own collection service and trustees. The same subject to or L/O opportunities fall into the sphere where I can point out to sellers why it is advantageous to do the Pactrust approach. Buyers will pay for the benefits of ownership beyond the benefits of a L/O.

On the performance mortgage- One attorney I have talked to has collegues that feel that the whole home lending law is unconstitutional in Texas but it is law and has yet to be challenged that way. What I have concerns about is the perfomance mortgage that is more than the original loan amount. There are 13 things you must do to be able to enforce a lien under the Texas home lending law. Since performance mortgage does not adhere to those standards then I question if it could be enforced. No, most sellers would probably not fight you. No, I haven’t spend the money on a legal opinion of that question. But then by using the Pactrust concept I don’t need to.

What I have done is contacted an attorney to review the home lending law in relation to using a Pactrust if the owners remain in the property after catching up back payments. How many preforeclosures of that type do you think there are?

Re: Bogus Lease Option? - Posted by JohnBoy

Posted by JohnBoy on July 03, 2001 at 21:01:54:

I don’t think a judge would classify a L/O as a contract for deed. What I was saying is that if a tenant was successful in arguing they have an equitable interest in the property that I would think before a judge would force a foreclosure that he would follow the same guidelines that followed in a contract for deed. Not say it’s the same thing as to where everything needs to be recorded and handled like a contract for deed.

You guys in Texas have some strange laws compared to us. You should catch up with Bud B. and David A. since they are in Texas and have done a number of both.

If I remember correctly, Texas only takes about 21 days to foreclose on a property? It can take 9 - 24 months here, depending on the buyer whether they file BK or not.