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.