Sandwich - with one bad bun? - Posted by Bo (GA)

Posted by Johnh(NH) on January 05, 1999 at 09:11:38:

Bo, you’re close. File a Memorandom of Option. This puts a cloud on the title because you are stating you have a legal interest in the property (it will not trigger the DOS). Lenders will avoid/question using the property as collateral for a loan. In any case, if you have an iron-clad option on a property that is over-mortgaged, that’s the seller’s problem, not yours.
If you’re worried the seller can’t close because of sickness, death, etc, have him place the necessary documents and instructions in escrow, which will be processed when you exercise your option regardless of the seller’s current condition.

Sandwich - with one bad bun? - Posted by Bo (GA)

Posted by Bo (GA) on January 05, 1999 at 08:34:40:

I have done a number of leases (with purchase options) on properties I own, so I am fairly familiar with the concept. Now I am about to get in to my first sandwich lease with purchase option, and I wondered if anybody has had any experience in these areas that they could share with me:

  1. When I lease with an option to purchase (being the middleman), how can get maximum protection for my purchase option, i.e. make sure that the seller will be able to close when my purchase option is exercised?

  2. One potential reason for the seller not being able to close could be that the seller has encumbered the property to the point where the money receieved when the lease option is exercised does not cover the seller’s note(s). Any idea how to prevent a second mortgage to be taken out? Of course, filing the purchase option as a lien would probably scare off potential new lenders, but could also trigger a DOS, however unlikely that may be. Any other ideas?

  3. Finally, even if everything is sewn up as tight as humanly possible, there could still be a nuber of reasons why the seller would not be able to close (illness, death, moved out of town/country, etc.). Has anybody had any experience with what would happen in that case? I can only imagine what my buyer will say/do if after paying a premium for the privilege of having a purchase option, but in the end not being able to buy. Is slugging it out in court the only recourse?

Your insight will be most helpful.

Bo (GA)

Re: Sandwich - with one bad bun? - Posted by Bo (GA)

Posted by Bo (GA) on January 05, 1999 at 20:41:52:

Thanks for the info. It will definitely help me.


Performance Mortgage - Posted by JPiper

Posted by JPiper on January 05, 1999 at 11:05:55:

Recording a performance mortgage (a 2nd securing your option) will handle all of your potential problems. If the seller doesn’t perform, doesn’t show up to perform,etc. you simply foreclose with your performance mortgage.

If the seller tries to overencumber the property, his lien will be recorded AFTER yours. When you foreclose it will be wiped out.

Naturally executing on this performance mortgage is a last resort. Having deeds held in escrow, having the payments made to a third party, or perhaps have a recorded option or memorandum are all good too. But the performance mortgage is what gives your agreement teeth.

You can get a performance mortgage from Bill Bronchick’s course “How To Be Your Own RE Lawyer”.