Lease/option step-by-step - Posted by JonC

Posted by JonC on June 21, 2002 at 14:06:32:

Thanks a lot Russ! I really appreciate the time you spent to answer.


Lease/option step-by-step - Posted by JonC

Posted by JonC on June 20, 2002 at 16:33:24:

Hi all-

I have been studying the archives on this site and I think I have a handle on L/O’s, but there are still some questions that I have. Here is how I understand the process:

  1. Find motivated seller open to idea of L/O.
  2. Get Purchase and Sales contract signed for the agreed upon sale price using the end of the lease as closing date (or before).
  3. Get Lease contract signed with seller detailing terms of the lease, including the right to assign or sub-lease. (Which form is recorded at the courthouse to protect my interests?)
  4. Perform due diligence on taxes, utility costs, etc… and title.
  5. Advertise Rent-to-Own to find new Tenant/Buyer.
  6. Do showings of property to prospective, qualified T/B’s.
  7. Winning T/B has greatest option consideration.
  8. Have T/B sign new sales contract and lease form with myself as seller including length of lease, rent credit if any, option strike price, etc…(the contract I have with the seller is evidence of my right to sell the property, right?).
  9. When T/B is ready to buy, execute a double closing with the title company.

I know I must be missing something. This seems too easy and I’m old enough to know “if it’s too good to be true…”

I have sales contracts and lease forms for use as well as contract addenda if needed.

Please tell me what I’m missing and how I can best proceed from here.

Thanks very much.

Buffalo, NY

a few notes - Posted by Russ Sims

Posted by Russ Sims on June 20, 2002 at 19:41:17:

You’ve got a pretty good handle on things…a few things to note. Do not have your tenant buyer sign a purchase and sales agreement. Simply have them sign a seperate lease and option agreement. The idea is to charaterize the tenant as simply leasing from you…he also happens to have an option on the property that he may or may not be able to exercise. In other words you don’t want the tenant to show equitable interest in the home because this could make an eviction really, really messy.Tenant could claim that the transaction is really a sale and this could force you into foreclosing. Foreclosure is a lot more time consuming and expensive than evicting. Now a tenant could argue equitable interest if he has an option, but he has a much weaker case than if he has a purchase agreement.

You are right when you assume that your contract with the seller proves you have the right to sell the property…Funny that in selling over 30 homes via the lease/option, I’ve never had a tenant “check me out” to make sure I’m the owner or at least have the property under contract. Kind of scary…

On step #2 you suggest signing a purchase and sales agreement with the seller. If you do this you pretty much guarantee that you’re going to buy the home…you don’t have the option of not purchasing. Why not simply sign an option instead. You’ll have the exclusive right to buy the home but if your t/b can’t perform and you don’t want to get the home financed, you can simply walk away from the deal w/no further consequences. A lease/option is almost always preferred over a lease/purchase.

On point number 3 you won’t record the lease agreement, but you will want to record the option agreement to secure your interests.

And don’t get your heart set on doing a double closing. Yes, it is still allowed by some lenders but not many so you really limit your options. I can’t tell you about the difficulty I’ve had in getting some of these deals done…Open the yellow pages and note the mortgage companies with the biggest ads. They are probably the busiest, most experienced companies around. Ask them how they would deal with a double closing or find out what they suggest as an alternative. You’ll get a free siminar.

Re: a few notes - Posted by JonC

Posted by JonC on June 21, 2002 at 07:12:02:

Hi Russ-

Thanks for the info.

So, there is NO P&S contract with either the seller or the T/B? Only a lease agreement and an option agreement with the seller to last for some number of years, and a separate lease agreement and option agreement with the T/B for an equal or longer period of time.

Does the option I have with the seller evidence legal interest in the property? I certainly don’t want to pratice realty without a license!

The only item I record is the option with the seller, right?

Thanks a lot for your help!

Buffalo, NY

Re: a few notes - Posted by Russ Sims

Posted by Russ Sims on June 21, 2002 at 11:55:00:

That’s right: there should be no purchase agreement with either party; the option you give your t/b should not be longer than the option you have from the seller. Ideally you’d want to have the option from the seller expire in at least 3 years… the longer the better.Then the option with your t/b should initially be for, say, a year and it will be renewable if the t/b behaves. So we tell our t/bs that they initially have a year, and if they perform as agreed on the lease agreement (payments on time!!), we’ll renew for another year and so on. This gives you the right to terminate a problem tenant: someone who either pays consistantly late or who has otherwise vioalted their lease agreement. Your t/bs option should never expire at the same time your option expires…make the option expire 4 months BEFORE yours does so that you have the opportunity to get financing in place if you want to buy the home. And you probably will want to buy the home because after 3 plus years there should be some pretty good equity. It’s okay to have the t/b’s LEASE expire at the same time yours does because if the t/b can’t purchase the home, you’ll want their income until you complete your purchase.

Your lease/option with the seller should give you the right to assign or sublet. Don’t get hung up on ‘legal interest’ in the property as if you might have to prove to someone you have the right to sell. All you are saying to a buyer is that you guarantee to pass title to them when they buy. You are warranting that you’ll sell them them the home. If you don’t they can sue you for specific performance. I know of no law that says I can’t sell my neighbor’s house if I want to. I’d just better be able to pass clean title to the buyer. It’s not practicing real estate without a license because I’ll actually be buying and selling in a double close…so I’m a principal in the transaction. I’m selling for myself, not someone else. That’s what separates me from a Realtor.

Yes, the only thing you record is your option with the seller. I take it a step further and have the seller give me a performance mortgage that basically says if they refuse to sell me the home, I can foreclose on them. You can find a performance mortgage in Bronchick’s lease/option course.