Re: L/O and acceleration clause - Posted by Brad Crouch
Posted by Brad Crouch on December 19, 1998 at 02:59:24:
Whether you own the property or not is not necessarily the issue. The Garn St. Germain Act says that a lease of more than three years violates the “due on sale”.
The lender may not find out about it if the lease were longer, or the lender may not find out about an option being involved, either. But you need to understand that these things “technically” violate the “due on sale” clause, and you should be aware of the risk involved, no matter how slight. You cannot just stick your head in the sand and keep the positive thought that this will remain unknown. Always be prepared for the worst to happen, and have a plan to deal with these kinds of happenings.
Also, any length lease when coupled with an option to purchase violates the “due on sale” clause, “technically”.
It might be a better strategy to have the seller put the property into a trust, and then fill out the documents assigning the beneficial interest to you. These documents can then be held by an escrow company or loan service company with the irrevokable instructions to release the documents to you (the buyer) when the total amount agreed upon has been paid.
I would wonder about the wisdom of “fixing up” a L/O. Why not just advertise it as a “handy man’s special” and let the tenant do the work. Have him submit the receipts for materials, and credit his purchase price accordingly. You get free labor that way. Plus the cash flow begins immediately, since you don’t have to wait for repairs/upgrades to be done before sub-leasing.
As far as “increasing the rents”, I would think it would be better to take over the property empty. Unless the current tenant wanted to L/O the place. And was ready & willing to sign an agreement and put up the maximum initial option consideration. If there is already a tenant in there when you take over, you would have to honor whatever lease they had. Then if they were unwilling or unable to come up with the option consideration, you’d have to spend the time and money to evict them. Better to start out with an empty house, in my view.
Rents should be at least the going rate for that area. More if you are giving a rent credit.
You will need the deed to the property before you can refinance.