Re: Lease Option Wraps - Posted by Jim FL
Posted by Jim FL on February 22, 2003 at 18:14:07:
Kristine,
I’m sure you know there are risks with ANY kind of real estate deal.
With a sandwich lease option, as you desribed, some of those risks are what you mentioned.
What if your seller fails to perform, the loan does not get paid, the house gets leins attached, the lender forecloses, the house burns down, the seller tries to back out etc.
Lots of little things that COULD go wrong.
However, there are ways to minimize this risk.
When you sign a lease option agreement with a seller, it is wise to get a deed to be held in escrow, so closing can be done easier when need be.
Also, recording a performance mortgage is a good idea.
With this recorded, you create a lein on the property, thus protecting your position.
Should the seller fail to perform, you can foreclose and get clear title to pass on to your buyers.
Should the seller try to refinance, or sell to someone else, the title company involved will find your recorded performance mortgage and contact you for a payoff.
Your performance mortgage will be senior to any other leins the sellers tries to have attached, and probably would prevent them from a refinance, or second mortgage being taken out.
A performance mortgage also can help you deal with the “Title seasoning issue” some lenders may have, when your buyers get financing.
They may want to seller with your buyers to be on title for a certain length of time.
Since you are not, this becomes an issue.
So, to handle that, with the performance mortgage recorded, you can simply assign your agreement with the buyers to the seller.
When the closing takes place, the title company finds your performance mortgage recorded, and contacts you for a payoff.
This will be the difference between your sale price with the seller, and the sale price with your buyer.
A lease option just as one agreement, with nothing recorded does leave you open to some risk.
This is why I now use a performance mortgage and a deed held in escrow for EVERY lease option deal I sign…which is not many these days…I buy more subject to than anything else.
As for making sure the payments are made, this is easy.
I have a “Company policy” which states that we send payments directly to the lender.
My lease option agreement even has a clause outlining this fact, and further states that the seller will give me “in writing”, permission to access information from the lender for the purpose of verification and managing the account.
I used to just have this as a company policy, and not in the agreement.
Then on one deal, a seller realized how much we were selling the house for to our buyers, because they apparently had a mutual aquaintence, and tried to get out of the deal.
They contacted a lawyer asking to get out of the agreement.
Basically, once the lawyer found the performance motgage recorded, he advised them they were in the deal for the duration.
However, he did make a stink about payments being sent to the lender direct, and DEMANDED we start sending them to the seller instead.
Not liking this, we met with the seller and her attorney, and decide to go ahead and mail them to the seller, but with the check made out to the lender.
They refused to pay for, or use a contract collection company or my attorney.
So, the new clause was added.
Lease options do have risk, just like any deal, but there are ways to make them more secure.
Anyway, hope this helps,
Jim FL