Unusual Lease-Option Problem - Posted by randyOH

import · April 12, 2006, 11:53am

Posted by Chris in FL on April 17, 2006 at 09:06:35:

First, thanks all for the positive responses to my post. Second, Brad Crouch asked regarding my quote
“I have a good lawyer, tight paperwork, and so far, I have never failed to get problem tenants out in 2-3 weeks or less”, is this “primarily” a function of the lawyer or the paperwork, and where did I get my documents from. Well, the quote is what I tell applicants, but is pretty truthful, too. I have never needed the lawyer in court (only to review the paperwork, etc.). When you treat people fairly and with repsect, combined with good paperwork, and due diligence, you will find you are not in court much (if at all). Also, biggest part of a quick, successful eviction is just doing everything right the first time. Second, I don’t even know where my paperwork started. It is a hodge-podge of everything I gathered that I liked, from years of being an avid learner, combined together, then ran past local real estate atty. for approval. A few pointers, though. The legal side of Lease-Options are very tricky, and depend a lot on local law and interpretation. Please, do not do them if you do not know them, understand them, and have a competent local r.e. atty. review them. A serious crackdown is underway regarding lease/option sellers taking advantage of tenant/buyers because of a few unethical people. Laws are changing daily, and you better not get into it if your intents are not ethical - people are going to jail!!! That being said, here are a few pointers that might help (not legal advice!)… I don’t give them an option, but, instead, a contract for option, that, should they honor the lease and the contract, means I will give them the option at a set time later (I do the last month of the lease). Your lease should be separate from your ‘contract for option’, and should never mention the option. Your ‘contract for option’ should clearly state that they must satisfy all terms of the lease in order to get an option to buy, and that, should they fail in any respect, you are allowed to evict according to Statute abc of state xyz landlord/tenant law. Knowledge is power; if you did not already know and understand these things and more, you don’t know enough about lease/options to use them safely and effectively. Take a course, study some material, and review everything with a local r.e. attourney. This is an area where shortcuts don’t make sense!
Lastly, if you are doing lease/options, and a dispute arises, don’t take advantage of innocent people because you may be able to get away with it. I do l/o for profit, but I do them ethically. My intent is to help people buy a home that otherwise might not be able to. I protect myself to the fullest extent possible, but I do everything I can to be fair (including giving breaks to good people that deserve breaks, even though the law and my paperwork don’t require it). Honesty, ethics, and fairness will pay off tenfold in the long run (count on it!)! Best wishes!

import · April 12, 2006, 11:53am

Posted by randyOH on April 12, 2006 at 11:53:53:

I have a tenant-buyer in the 16th month of a two-year lease-option. The rent is $550 and the option fee was $2,000. She is now asking if she can move into another one of my houses that rents for $500. She is asking if I can just transfer her $2,000 option fee to the other house. She has been a pretty good tenant.

The house she wants to move into has been vacant for about six months. I am planning to reduce the rent and just rent it out on a month-to-month basis. The house she is living in would probably not be any easier to rent than the one she wants to move into. The rental market in this area has been really bad for the past year.

Looking for some advice. How would you handle this situation?

Thanks.

import · April 14, 2006, 8:48pm

Not a hotel… - Posted by MatthewC

Posted by MatthewC on April 14, 2006 at 20:48:33:

We have had that request and we tell people that we aren’t in the hotel business. You don’t simply change properties at will. If they want to do that, then they will not have the option to purchase. We can treat them as straight tenants.

It is a bad precedent to have tenants move from property to property. There are turnover costs involved.

MatthewC

import · April 14, 2006, 3:15pm

Re: Unusual Lease-Option Problem - Posted by Chris in FL

Posted by Chris in FL on April 14, 2006 at 15:15:16:

Randy, I will just give you an idea of what I do with my lease/options, and let you decipher for yourself what is applicable. When I do a lease/option, I always let the tenant/buyer know that everything they pay is nonrefundable if they don’t buy “because the paperwork is designed to protect me”. Paperwork states that it is inclusive and total agreement, and, unless there is something in writing signed by both parties there is no other agreement (meaning verbal agreements won’t stand up, in case someone tries to cheat me by putting words in my mouth). I explain that the program is designed to help someone buy, and, if they aren’t serious about buying, they shouldn’t throw away the extra money for option fee and increased rent (I get slightly above market rent with this program). Then, I tell them that I am fair and reasonable, and I always try to do the right thing (which is the truth). I tell them that the paperwork protects me because of people that would try to take advantage of me, but, if they pay good and take care of my house, I will work with them. I explain that if they were A-tenants, and move out at the end of the lease/option, I will probably work with them on returning some of their option fee, though I will also keep some for my trouble. That beats someone tearing up my house or leaving in the middle of the night because they feel cheated that they lost all of their option money, and it is fair to both parties as well. I do a 1-year term, will renew under similar terms if they need more time and wish to stay, and, if they pay on time every time and keep the place nice, I will “likely” owner-finance them after two years (price set by option, terms negotiable, but try to find something that works for both parties). Furthermore, I notify them that I have 15-20 houses, and get more all the time, so we have alternatives. I tell them, if the lease ends, and they decide the house is too big, too small, they want something nicer, cheaper, or whatever, let me know. We can always look at other houses I have, and consider transferring their interest to a more suitable property. “Keep in mind, I might not have exactly what you want when you want it, but if you stay with me we can always wait for something to open up or come along that works.” Let me tell you, the customer loyalty this builds is incredible! This is a FANTASTIC selling point, and people call me all the time wanting to lease/option or rent from me because they hear good things about how I treat my tenants and tenant/buyers. Between this, and the fact that I make my houses nicer than the other guy, my houses never sit empty! Hope some of the info. here helps people looking at lease/options. Best wishes!
P.S. - Also, renting or lease/option (which I usually call rent-to-own to applicants because it is ‘speaking their language’), I notify every potential applicant, “I have two rules: pay on time, and take care of this home. If you do both, I will be your best friend. I am good people, and I look out for my tenants. If you don’t, I will come down on you with no mercy, and you will wish you never met me. I have a good lawyer, tight paperwork, and so far, I have never failed to get problem tenants out in 2-3 weeks or less. I am fair, but I am firm.” This sounds tough, but the good candidates understand it for what it is, and it weeds out a lot of the bad ones. They know I am serious, and they look for easier targets.

import · April 14, 2006, 11:39am

Thanks for the input. nt. - Posted by randyOH

Posted by randyOH on April 14, 2006 at 11:39:17:

nt

import · April 12, 2006, 8:52pm

Re: Unusual Lease-Option Problem - Posted by Anne_ND

Posted by Anne_ND on April 12, 2006 at 20:52:51:

Randy,

If her reason for moving is just that she wants the lower monthly amount, then offer to lower the monthly where she is by $25 and either lower her rent credit or increase her strike price.

If the reason she wants to move is that she actually prefers the other house, then I’d allow her to move only if her present house is in the same or better condition as when she moved in (for instance, she might have put in carpet or new appliances) and she loses half of her option consideration.

In a soft market the important thing is to keep her in one of your houses, and paying you- but you are going to lose out if she moves, so don’t give her the full option.

good luck, these soft rental markets are really a challenge.

Anne

import · April 12, 2006, 12:43pm

Re: Unusual Lease-Option Problem - Posted by Larry

Posted by Larry on April 12, 2006 at 12:43:51:

If she is a real good tenant then she is worth keeping. I would negotiate an additional option fee and possibly increase the $500 rent to offset your loss. But if you “split” the option fee with her for $1000. You gain $1000, lose $25/month in rent but keep a good tenant happy.

import · April 12, 2006, 12:24pm

Re: Unusual Lease-Option Problem - Posted by Kevin - WA

Posted by Kevin - WA on April 12, 2006 at 12:24:45:

Randy,

That is a tough one. I would probably see if I could get some additional option money out of it. Bottom line - if she does not buy the current house, she loses the option fee. The other house is a separate issue. Since has been a good tenant, you could say you will let her move into the other house for an extra $x ($1K?) as option fee, roll over what she has already paid, and all her to continue the contract. Or, tell her that she can have the other place for $550 rather than $500.

I guess what I am saying is that for you to accomodate her should benefit you in some way. Otherwise, she moves over, transfers all her payments, and you lose $50 a month. You already said that you don’t expect to be able to rent her current place, so the net result is a $600 annual loss for you.

That is my initial thought - I would be glad to hear what some of the more experienced minds have to say.

K

import · April 17, 2006, 6:07pm

Re: Not a hotel… - Posted by randyOH

Posted by randyOH on April 17, 2006 at 18:07:48:

Matthew,
How do you handle the option fee issue where a tenant wants to move to another house?

In my case I have decided to let my tenant move to the other house and just rent it month to month if she gives me a one-month security deposit. She has already told me she would prefer to just do a straight rental on house #2. She will not get her option fee back on house #1. If she complains about that, I will tell her that I am willing to give her credit for the option fee on house #1 if she ends up buying house #2.

I have not yet presented this to her. I have decided that before I make her the offer, I want to do an inspection of house #1. If she has made a mess of this house, then the deal is off.

Thanks for your comments.
Randy

import · April 14, 2006, 5:29pm

Re: Unusual Lease-Option Problem - Posted by randyOH

Posted by randyOH on April 14, 2006 at 17:29:05:

Chris,
Thank you very much for your thoughtful advice. You have given me some things to think about, not just for the problem at hand, but for my overall business model.

I have printed out your reply and I will be studying it and will probably be making some changes in the way I work with my tenants. You have given me some excellant ideas to work with.

Thanks again,
Randy

import · April 18, 2006, 1:25am

Re: Not a hotel… - Posted by MatthewC

Posted by MatthewC on April 18, 2006 at 01:25:44:

My option agreement is clear. If they leave the property (or the underlying lease), they simply lose the option to purchase that house. They will have to come up with new option money.

I am not saying you can’t bend the rules a bit to be accomodating but the issue is whether they want to be treated like tenants or homeowners. Homeowners have responsibility to the property they moved in. They dont get to move around at will.

If she is unhappy, then she can move on. A lot of what I do is “train” the tenants. For some it works, others are more challenging.

What you are proposing to do (while well intentioned) sets you up to be the bad guy if things don’t go well. What will you do if the tenant doesn’t like the 2nd house? Will they demand to go to a 3rd house? Or will they demand to go back to the original house?

You see how that system can get all twisted up and abused?

MatthewC