Lease Option/Owner Financing - Posted by Rich

Posted by marc on November 18, 1999 at 12:09:48:

technically she is but in a practical matter you can do it anyway. the chances a lender will call a loan due on a lease option is slim and none. for owner financing it could happen if you exchange title. check with your attorney to see how you can protect yourself.

Lease Option/Owner Financing - Posted by Rich

Posted by Rich on November 18, 1999 at 11:55:54:

I recently put a property I own (I owe about $50k on it) on the market with a broker friend. I asked her about including in the listing that I would consider ‘lease optioning’ or ‘owner financing’. She told me that since I don’t own the property free and clear that I couldn’t sell it that way because the infamous ‘due on sale’ clause - and the ‘no assigning’ clause. Is she right?

Re: Fire the Agent and do a PACTrust™ - Posted by Bill Gatten

Posted by Bill Gatten on November 21, 1999 at 17:08:07:


Any lease for more than 3 years IS a DOS violation!
Any lease containing an option to purchase IS a DOS violation!
Any divestiture of title interest via sale, transfer or hypothecation other than via an inter-vivos trust IS a DOS violation.
A DOS violation does not instantly invoke a foreclosure (and may never do so).

Placing a property into a land trust is NOT a DOS violation; and leasing a property out is not a DOS violation (assuming the requirements of Garn St. Germain are adhered to). Whether the lender would care or not, or would exercise its right to foreclosure or not, is wholly another issue ('need a crystal ball for those calls).

The fact is that a private, federal or state mortgage lender has the absolute right to foreclosure on a DOS violation if they choose to exercise it; and they will not waive that right just because you’re a nice guy (kind’a their Ace-in-the-Hole, as it were, if they ever need money in a hurry).

Most CRE folks don’t worry about DOS calls (me included); but neither do they worry about airline crashes, or being mugged in their own neighborhoods, but the fact is that those things do happen often enough to require some careful consideration in advance: and to some folks its a bigger worry than it is for others.

If you want to safely and ethically avoid the issue (and several other potential pitfalls that could be found in L/O’s), consider this:

Why not place the property into a land trust; then lease the property to your optionee prospect on a triple-net basis (i.e., wherein the tenant pays all costs of ownership)…without any option to purchase.

Next make the tenant a co-beneficiary (resident beneficiary) in your land trust. At this point, the Beneficiary Agreement between you and them stipulates that they can buy the property at the trust’s termination in 2-3 years for full Fair Market Value…just like anyone else would: but MINUS any monies the trust would owe him/her at termination. These moneys’ owed will, of course, be the appreciation and equity build-up [principal reduction] as well as any equity contribution [down payment] having been made at inception): in other words, they simply pay off the existing loan and they own the property.

By handling it this way there simply is no provision for a “bargain buy-out,” and there is no pre-arranged “option to purchase.” As a matter-of-fact, no transfer of the RE (beyond placing it into the wholly allowable trust) or “sale” of the RE has effectively taken place. And such sale will not take place until the trust is revoked and the acquisition of its asset (the property) by whoever the buyer may turn out to be. Presumably, of course, the buyer will be the trust’s triple-net lease tenant.

Further, with this (PACTrust) arrangements, you needn’t worry about classical eviction problems (e.g., refusal to leave due to a claims of “equity”), or the potential for the lessee’s personal liens, suits, BKS’s marital disputes, tax liens, etc. None of these can ever involve, or attach to, your property’s title, and/or adversely affect you and your good credit and name.

Hope this helps.


P.S., I’d fire that agent of yours if I were you. Realtors with no sense of creativity or desire to know or seek out the loopholes are worthless!

Re: Lease Option/Owner Financing - Posted by Bill in OR

Posted by Bill in OR on November 19, 1999 at 14:17:18:

well, if it’s a FNMA loan, check paragraph 17 in the trust deed. I believe that’s the paragraph that talks of lease/options which extend 36 MONTHS OR MORE, which are deemed to violate the DOS clause.