Does selling a rental break it's lease? - Posted by Steve Heller

Real Estate Investing
#1

Posted by Marty Weisberg on October 25, 2000 at 14:51:13:

Rich,

I am not sure exactly what you can do at this point in terms of changing the lease that you have with your current tenants. You need to figure that out based on your local laws. If I am reading what you wrote right, then with rent credits after the first year they can buy the house for $112,800 ($120,000-$7200 rent credits), second year $112,000 ($130,000-$18,000 rent credits) and the third year $116,600 ($140,000-$23,400). According to your scenario you are selling the house in each of the three years for less than the low end of what you think it is worth.

The problem as I see it is that you made it to easy for the TB in the first place. I am sure that they were hoping that as time went on that they would be able to make the higher payments and that has just not happened. You, in my opinion , put yourself in a tough position especially since you are not getting a higher price for the property as time goes by.

I think a better way to do this type of deal and maybe still a way that you can do it, is by using a PACTrust.

What you would do in that situation is:

  1. Put the property in a land trust (PASCTrust).
  2. Find a resident beneficiary that you could put in the property. this can be either the existing tenants or new tenants if you can get the existing tenants out.
  3. Have the Resident Beneficiary come in with something like $6K to $8K up front.
  4. Have them lease the property from the trust for say $1,200 to $1,400 a month or higher(I am not sure what your market will bear)
  5. Give them say 3 years (or whatever time frame you like) to buy the property at the then appraised value.

In this scenario above the resident beneficiary is getting a host of benefits that he/she are not getting with the lease option. Included in this is the ability to take the active tax write-off for both interest expense on your loan and the real estate taxes. Thereby allowing him to pay more a month in lease payments and actually saving money.

You on the other hand are not giving anything up in giving him these advantages.

Let me know if you have any questions. I kind of did this in a hurry and may have left somethings out.

Marty

#2

Does selling a rental break it’s lease? - Posted by Steve Heller

Posted by Steve Heller on October 23, 2000 at 08:22:23:

Hi Everyone,
Does selling a rental break the lease with the current tenants? It’s a one-year lease. I don’t want any ties with the renters after I sell the property.
Thanks,
Steve

#3

Re: Does selling a rental break it’s lease? - Posted by Rob FL

Posted by Rob FL on October 23, 2000 at 14:31:09:

The others are right. The buyer sort of “inherits” the current tenants.

I always put a clause in my leases that gives me the right to break the lease with 45 days notice if the property sells. It’s a good way to sell properties vacant if necessary.

#4

I also had to honor the lease. - Posted by SusanL.–FL

Posted by SusanL.–FL on October 23, 2000 at 11:03:07:

My lawyer said that our lease had to be honored in the sale.

Unfortunately, my buyer and the renter didn’t get along. After we closed, they were STILL showing up at MY front door to have me ‘mediate’!

I finally said, ‘Whoa boys! You are gonna have to take it from here. I’m no longer in the picture.’

They eventually worked things out and everybody was happy.

#5

Re: Does selling a rental break it’s lease? - Posted by Marty Weisberg

Posted by Marty Weisberg on October 23, 2000 at 08:39:09:

Steve,

The selling of a property does not break the lease. The purchaser of the property is obligated to honor the lease. If you sell the property though, you would no longer have anything to do with the property or tenants.

Marty

#6

How about selling a property with a lease/option - Posted by Rich

Posted by Rich on October 25, 2000 at 12:10:49:

I have a property that I have leased with an option to purchase. Part of the tennants money goes toward the purchase price. The price of the property increases as the years go by. (1st year - $120k; 2nd year $130, 3rd year $140k). The rent also increases with time. My goal in setting it up this way was to have them purchase the property, sooner, rather than later. I am just beginning the 2nd year of the lease and the tennants tell me they are going to have a hard time paying the increased rent ($800 up to $1200). They asked if I could keep it at $800 for the remaining 2 years. My mortgage is more than this, but to get it rented, I was willing to ‘bite the bullet’. I would like to get out from under this property, and have encouraged them to try and get financing, but they said they can’t. I’m thinking of adding an addendum to their lease which says that I will continue to lease the property for the remaining 2 years at $800 per month, but none of the money they have put into the property will be applied to the purchase price, which I will adjust to allow for the amount of money they have paid in rent up until now. And none will be applied in the future. I will also include that I will have the option of selling the property at any time, to anyone, and the new purchaser can abide by my lease or give the tennants 45 days (or whatever length of time that is legal) to move out.
Does this make sense? Should I just draw up a new lease without an option to purchase?
Thanks for your help.
Rich

#7

Re: How about selling a property - Posted by Marty Weisberg

Posted by Marty Weisberg on October 25, 2000 at 13:00:21:

Rich,

I have a couple of questions to ask before I can make any suggestions. First of all. Do you own this house or is it a sandwich lease? Secondly what is the FMV of the property? What is it leased for now and how much of that is a credit? What is the credit in the second year? What is the total length of the lease?

I see a couple of problems with the way it is currently set up. But let’s go over that when I know the answers to the above questions.

Marty

#8

Re: How about selling a property - Posted by Rich

Posted by Rich on October 25, 2000 at 13:45:04:

I own the property (well, actually, the bank owns it…:slight_smile: Fair market value is probably in the $130k - $150k area. The first six months was $400, the second six months was $800, and the second year is $1200, and the third year is $1200. As I stated before the price also raised each year. The amount applied toward the purchase is 100% first year, 75% second year, and 50% third year. Total lease is 3 years. My mortgage balance is $110,000.

  • Rich