Posted by Eric on August 19, 2004 at 11:53:36:
Thanks for taking the time to help a newbie JohnBoy!
-Eric
Pitfalls of lease option - Posted by CA
Posted by CA on August 19, 2004 at 24:27:04:
What are some of problems(so one can avoid) that an investor can experience doing lease option to buy, besides tenant trashing a place?
Re: Pitfalls of lease option - Posted by Jeanne
Posted by Jeanne on August 19, 2004 at 15:26:41:
Article by William Bronchick: http://www.real-estate-online.com/articles/art-134.html
Re: Pitfalls of lease option - Posted by dothedeed
Posted by dothedeed on August 19, 2004 at 08:43:12:
Here’s just a few things that can mess up a plan off the top:
Owner files BK.
Owner doesn’t make payments to lender - interest and penalties pile up. Foreclosure looms.
Owner is sued. Assets tied up until case is settled.
Owner doesn’t pay income taxes - IRS files lein.
Owner doesn’t pay property taxes - Property sold at tax sale.
Owner has issues with tenant - tenant moves out.
Owner dies. Property tied up in probate.
Owner goes into nursing home. Assets tied up. Heirs claim owner wasn’t competent to handle affairs - demand more money.
Owner gets a better deal. Sells to another buyer.(Maybe your tenant!)
Owner gets refi or HELOC. Pulls out all the equity. Files BK
Owner gets divorced. Ex-wife (still on title) files BK.
Owner turns out to be a drug dealer or criminal. Assets seized by government under RICO laws. (You don’t think this can happen - just look at the governments web site for auction properties!)
While most of these aren’t deal killers, any of them can happen as well as many I’m sure I overlooked. If they do, at BEST you will be spending time and money you hadn’t planned on spending as well as keeping your attorney fully employed.
Moral - Do as much as you possibly can to control the deal and get yourself on title if possible
Re: Pitfalls of lease option - Posted by JohnBoy
Posted by JohnBoy on August 19, 2004 at 10:03:50:
All of those things can easily be overcome by recording a performance mortgage. That will place your lien on the property ahead of any future liens caused by the seller and you can wipe them all out by foreclosing on your performance mortgage.
As far as seller not making the payments or paying the taxes, NEVER send your money to the owner and trust them to make the payments. YOU send the payments directly to the lender and YOU pay the taxes and eliminate any risk of the seller not making the payments. If there is any money left over after covering the mortgage, taxes and insurance from your rent to the seller, then send the difference to the seller if there is anything left.
Have the owner sign a deed to be held in escrow with written instructions to insure you get title when the time comes.
All those problems and risks are avoided.
Re: Pitfalls of lease option - Posted by Jeff
Posted by Jeff on May 13, 2005 at 11:03:58:
In the above post, you mentioned giving your positive cash flow to the seller after all mortgage, insurance, and taxes are paid each month. Why do this? Am I missing something, or is there a legal reason for doing this. It seems to negate one of the major benefits of lease optioning.
Thanks!
Re: Pitfalls of lease option - Posted by sptk
Posted by sptk on August 19, 2004 at 19:30:32:
I’d like to thank both dothedeed and JohnBoy for informative posts. Great info!
Re: Pitfalls of lease option - Posted by Tom Kirby (p.a)
Posted by Tom Kirby (p.a) on August 19, 2004 at 16:15:17:
John Boy, I asked someone from P.A, I think it was WM-pa about recording a performance mortgage in P.A. He said,he tried like hell to record one in Harisburg but could not do it. Are there states or certain countys that will not allow a performance mortgage to be recorded?
Thanx, Tom
good info thansk for posting John Boy - Posted by mattc670
Posted by mattc670 on August 19, 2004 at 13:02:14:
good info thansk for posting John Boy
Re: Pitfalls of lease option - Posted by Eric
Posted by Eric on August 19, 2004 at 10:31:11:
JohnBoy-
Could you briefly explain what a performance mortgage is? I have a general idea but not a firm grasp on the term/concept. My RE terms dictionary does not have it listed.
What are the requirements for placing an actual lein on a property?
Thanks so much,
Eric
Re: Pitfalls of lease option - Posted by JohnBoy
Posted by JohnBoy on May 13, 2005 at 17:47:21:
Nope! That’s not at all what I mentioned.
What I said was if what your payment to the seller is more than what their PITI payment is then take whatever the seller’s PITI payment is and pay their lender directly to insure the payments are made and just send the seller any difference, “IF” there is any.
If your payment to the seller is $1000 and their PITI is a $1000 then the seller wouldn’t have anything extra coming.
But if your payment to the seller was $1000 and their PITI payment was only $500, then you would send $500 to the lender and the $500 difference to the seller.
This has nothing to do with what your positive cash flow would be.
If you paid the seller $1000, and you collect $1200 from your tenant/buyer, then you would get $200 positive cash flow, the seller’s bank gets $500 and the seller gets $500.
You won’t always get a property for just what the seller’s payments are. If they have a lot of equity then you may need to pay the seller more. If the seller sells on terms the payment you have to pay the seller may be more than what the seller owes.
If they have a $100k house and only owe $50k with a $500 payment, you likely wouldn’t be able to L/O it from them for just their payment amount. You may need to offer $700 - $1000 to compensate the seller for some of their equity.
If the seller has little equity then buying it for what their payment is will be more likely. Then the seller wouldn’t get anything extra over what their payment is.
Not every deal will be for just what the seller’s payment is.
I don’t care what their payment is or how much I may have to pay them per month to get the deal. As long as I can get what I need to get over and above whatever my payments to the seller is, then I’ll get my positive cash flow. So I’m not paying the seller MY positive cash flow. I’m paying them THEIR positive cash flow if they have a lot of equity in the property that warrants paying them more. If that works out to be more than what their payments are then they get the difference. If not, then there is no difference and all my payments to them go directly to their lender.
Re: Pitfalls of lease option - Posted by JohnBoy
Posted by JohnBoy on August 19, 2004 at 23:03:01:
I haven’t heard about any. The only thing I heard was that a performance mortgage was not enforceable in Texas. That is the only state I heard anything about.
Perhaps it was the way the performance mortgage was drafted as to why he had a problem recording it. Typically, a performance mortgage looks exactly like a typical mortgage and unless you were to actually read it you wouldn’t know it was anything different from a standard mortgage.
The top of the performance mortgage should just say, “MORTGAGE”. How would anyone know it was different from any standard mortgage unless they took the time to read it?
Re: Pitfalls of lease option - Posted by JohnBoy
Posted by JohnBoy on August 19, 2004 at 11:34:48:
It’s basically the same as any mortgage. Only instead of a mortgage to secure a loan its a mortgage to secure the performance of a contract. It places a lien on the property the same as any mortgage would. Your performance mortgage would be in second position behind a first mortgage the same as any second mortgage.
The same requirement as any other mortgage. The seller gives you a mortgage on the property. They sign it and you have it notarized and then record it.
Bronchick covers this in his courses.
Re: Pitfalls of lease option - Posted by Jeff
Posted by Jeff on May 14, 2005 at 10:14:25:
Thanks a lot. That cleared that up. As always, your posts are as informative as any article on this site.