LEASE OPTIONS...I'M CONFUSED... - Posted by jp moses

Posted by JohnBoy on December 19, 2000 at 23:08:44:

You can record it yourself. Get Bill Bronchicks course, “Nuts and Bolts of Creative Real Estate Transactions”. It has EVERYTHING you need in it, including a performance mortgage.

When you look at a performance mortgage it looks exactly like a regular mortgage that is recorded. Unless someone was to really read the document they would assume it was a standard mortgage that was recorded and draws less attention. Plus the performance mortgage would prevent the seller from refinancing the property without your knowledge because the lender would require you to suboridinate your position behind their new mortgage. This is much more powerful than just using a memorandum of option.

Heres the link to read all the info about his course:

LEASE OPTIONS…I’M CONFUSED… - Posted by jp moses

Posted by jp moses on December 19, 2000 at 14:03:38:

As a budding investor, I’ve realized that I definitely needto learn more about lease options as a tool to quickly add to my toolbox. I’m going to be purchasing one of the many courses available very soon, but have a couple of questions I’d like to run by you “old-timers” first:

Which, if any, course on L/O do you personally recommend & why?

If I purchase a property through traditional lending, & then decide to lease option it out to my tenant/buyer, do I violate my due-on-sale clause? If not, why not?

How can purchasing through a lease option help me out in a situation in which my seller has very little equity? I’ve heard this referred to on this forum before, but the logic just isn’t “clicking” with me.

Thanks much for your time.



Posted by Matt B on December 19, 2000 at 14:38:18:

Well, I don’t know if you could call me an “old-timer” (I’m only 27) but I have done a few lease option deals. I have used and recommend Ron LeGrand’s course.

If you buy a house and lease option it out, the deed is not transferring hands, thus there should be no violation of the due on sale clause. Unless there is some specific restriction associated with your mortgage stating that the property cannot be leased out, you should be fine. I have even had sellers tell the bank to send the statement directly to me, and I am the one writing the check to the bank, so they are aware that there is someone other than the owner paying the mortgage. However, the deed is still in the mortgagee’s name, so there is no violation of the due on sale clause.

The way that it helps sellers with a property that has little equity is because it is extremely difficult to sell a house with little equity. If you list it with a realtor, you must make sure that you sell it for enough to cover their commission. If your equity is small, you may end up having to ask for more than the house is worth to cover their commission. This makes it nearly impossible to sell. What bank is going to lend more than the house is worth? Very few, if any.

If the seller tries to sell it themselves, they are probably going to realize that they are no real estate expert and are going to have a hard time getting a buyer to commit. On top of that, they may also realize that the buyer may want to negotiate on price, which may either leave the seller with no profit, or not allow them to do the deal at all since they don’t have any space to budge on the price.

It is possible to show sellers that since they would just end up walking away from the deal with enough to pay off their own mortgage, that they could sell the house to you for what is owed on it. You, on the other hand can profit by collecting an upfront option deposit from a tenant/buyer (usually 3-5% of the purchase price), the monthly spread from the amount you collect in rent that is above the monthly mortgage payment, and plus you can charge a higher sales price. You can charge the higher price because the property will most likely appreciate as time goes by and your sub-tenant/buyer pays into the property each month.

I hope that helps. Make sure to buy a course soon to study up on all the specifics. I love lease options!


Posted by JohnBoy on December 19, 2000 at 16:33:25:


Although you may have had no problems with any of these lenders doing a L/O, the option does violate the due on sale clause in most mortgages. Most mortgages allow you to RENT the house out after one year but the OPTION is a violation of most due on sale clauses.


Posted by Matt B on December 19, 2000 at 18:10:11:

You’re right. My mistake. I remember that I did actually have one owner decide not to sign with me after they called their bank to ask about the lease option contract and if it would affect their mortgage. The bank basically told them what you just wrote.

Although I would assume that it is such a minor issue, and most banks wouldn’t care, it is valuable to know about this. Thanks for refreshing my memory. Jeez, just a few months away from the “action” and I’m getting rusty!


Posted by JohnBoy on December 19, 2000 at 18:18:21:

As long as you don’t record anything pertaining to an option then it’s unlikely the bank would ever find out any way. Instead, record a performance mortgage and it will look just like a standard mortgage that has been recorded against the property in second position. Don’t let your tenant/buyer record anything.

Re: LEASE OPTIONS…I’M CONFUSED… - Posted by jp moses

Posted by jp moses on December 19, 2000 at 20:55:10:

So, let me get this right (thanks for your patience with the newbie)…

Even though no deed changes hands until the option is exercised, it’s still to be somehow recorded immediately after the initial agreement? Really?

If I did it the way you (JohnBoy) said - as a “performance mortgage”, would I need to take care of this myself, or just instruct the closing title company how I want them to do it? Will they record it that way for me to help insure my protection?

Maybe I’m just obsessing here. I know everybody says “don’t owrry about it. If you’re making your payments, the banks won’t care to call”. But I’m just nervous that on the rare occassion that they for some odd reason DID call, then I’d be stuck up the creek without a paddle.

So…hmmmmm…what do you say?