lease-option pitfalls - Posted by J. Warner

Posted by Stewart on October 31, 2003 at 22:38:41:

The difference is the selling on their own part. Doing a sub2 refinance, they get their money and don’t have to wait, they sub2 and get out of the picture because they don’t want to wait around to sell the house, if they can sell the house very soon. Instead of maybe waiting months down the road, they get money right now. If they refi now but don’t sell, then they get the higher payment to carry.

lease-option pitfalls - Posted by J. Warner

Posted by J. Warner on October 31, 2003 at 12:05:40:

OK, I am ready to do my first deal – I think.

I have picked my neighborhoods that I will be farming. I picked 2 large neighborhoods of 2-4 year old homes where the builder was aggressive getting buyers in the door and now their is an above average # of foreclosures and homes for sale in the neighborhoods (though they are still relatively nice and in a fantastic location). These are first and second buyer homes.

I have had door hangers printed that kids will place while walking the neighborhoods this weekend (and once a month thereafter).

I have read the books.

I know I will be scolded, but my conservative nature forced me to go to a local RE attorney to have contracts drawn up (as opposed to using standard forms from one of the courses).

I have spent the past month advertising in the ‘homes for rent’ section of our local newspaper and now have a small database of people looking for a rent-to-own deal in the area that I will be farming.

WHAT AM I NOT CONSIDERING??? I am sure I need a larger farm area, but I wanted to start small.

If you have experience doing lease-option ‘sandwich’ deals, and if you can spare a couple minutes, I would love for folks to tell me some of the pitfalls I have not thought of, and the books don’t tell you.

Thank you, Thank you, Thank you!!

Re: lease-option pitfalls - Posted by Christian Beebe

Posted by Christian Beebe on October 31, 2003 at 14:19:07:


First, I don’t who the heck would scold you, but using a local RE attorney is probably one of the best things you could have done…because if something goes wrong, it’s his fault, not yours for using some “standard” form, that’s protecting your best interest.

Second, I think you are doing great, you just need to make sure of a couple things…that you ALWAYS TAKE AN OPTION FEE or upfront money. You will hear a lot of different ideas and opinions but worst case scenario, always take two months rent up front. And never…and I repeat never, ever, ever use that money for as long as you can stand it, at least 2-3 months. Also, when you have your sellers hand their house over to you, make sure that they sign Joe Kaiser’s Best Darn Document, also use this when signing up renters.

When approaching sellers and getting excited about a possible deal, make sure in your contracts and conversations that you know for fact that they are up to date with their payments. In your contract, if you should find out that they are not up to date, then the contract is null in void or they owe you money,etc. Make sure that your tenants know the upfront is non-refundable but will be used against the final purchase price of the home.

That covers most of it, there is more and if you need any help, just email me.

Christian “The Solutions Kid” Beebe

Re: lease-option pitfalls (long) - Posted by Russ Sims

Posted by Russ Sims on October 31, 2003 at 13:47:44:

No reason to feel guilty about having a local RE attorney draw up contracts…cross check their contracts with the ones from, say, Bill Bronchick and make sure all the key elements are there (starting with making sure you have seperate lease and option agreements). Keep in mind the guru contracts are somewhat generic and they don’t take into consideration local landlord tenant laws…this is something your attorney will be mindful of.

I’m going into my 5th year of doing this full time. Rewards aplenty await you down the road if you stay the course. Headaches aplenty, too. Most of those will come from your tenant/buyers. Screen them diligently. Check on them often, at least in the first year of their agreement. Give neighbors of the tenants your phone number in case they see questionable activity going on (like loud parties, property damge, tenant friends that show up and never seem to leave… they probably live there). As warm and fuzzy as it makes us all feel to provide a home to someone who can’t get a loan, keep in mind that the reason they can’t get a loan is because they are irresponsible. That trait generally carries over into every aspect of their life. That includes making sure you’re paid on time, taking care of the home you’re controlling, and makeing progress in getting the home financed.

When you sign with a tenant make sure they know you are strict about enforcing timely payment. Tell them that if they don’t have a friend or relative that can come to their aid and make a payment for them in hard times, then they had best look for another home because they will be evicted regardless of the circumstances. Of course you can always make a judgement call on whether or not you’ll work with them
if they are having difficulty, but realize if you go soft once, they’ll expect it again and again. Best just to stick to policy.

Learn your lenadlord/tenant laws inside and out. Go to court and watch evictions. Get familiar with that process because if you know how it works, you won’t be as hesitant to evict someone when the time comes.And for goodness sake keep a cash reserve for when bad stuff happens.

I don’t do sandwich lease/options any more because I learned it’s just as easy, if not easier to get the deed from the seller via a 'subject to’transaction. Some folks had rather just control vs. own the homes. For them lease/options make sense beacause if property values go down, they are not stuck with a depreciating home. I like having the deed because the seller is completely out of the picture and they can’t complicate issues down the road. Having the deed also makes it relatively easy for me to refinance the home in a couple of years if my t/b can’t purchase the place. Go ahead and start with lease/options but consider researching ‘subject to’ to see if it works for you.

I’m sure I make it sound as if dealing with tenants is a nightmare…it only is sometimes. Most of them are great. As for the bad ones? Just make sure you buy the home with some equity and take a decent option fee up front and you really can’t lose in the long run.

Re: lease-option pitfalls - Posted by Kevin-ATL

Posted by Kevin-ATL on October 31, 2003 at 15:25:35:

Can you please email me with a little more info about this “best darn document?” Why do you suggest not using the option money for at least 2-3 months? Emergency fund? There’s probably more I’d like to ask when I think of it… mind if I email you? Thanks.

Re: lease-option pitfalls (long) - Posted by DaveD (WI)

Posted by DaveD (WI) on October 31, 2003 at 15:07:15:

I do both Russ. Reason being it’s hard to get the deed when the house is free and clear or liened where the seller is protecting a very large equity.

You say, OK, let them carry paper. Agreed, but sometimes they feel better with me renting now, buying later. Still accomplishes the same thing but it always comes down to what they need, not so much what I want.

Re: lease-option pitfalls (long) - Posted by Dick Chelten

Posted by Dick Chelten on October 31, 2003 at 17:49:00:

Sometimes when the home is free and clear or has substantial equity, I suggest the Seller refinance at the great rates currently now being offered. One of my most profitable deals is one where I had my Seller refinance their 9.5% !56k home mortgage (she got 6.5%)and I bought the house subj2 for the re-financed amount (174k). Only cash I brought to closing was for their refi costs(4k).
I put some into fixing up the place ($10K) and have L/O’ed it for $244k with $12 K as NROC. I get good cash flow and the Tenant/Buyer’s mortgage officer, who visited the house, said he could get her financed within 6 months. I’m crossing my fingers!

Huh? lease-option pitfalls (long) - Posted by tom

Posted by tom on October 31, 2003 at 19:13:45:

Why would the owners bother to sell subject to
if they could refinance, have enough equity and sell on their own?