What about not-getting-the-deed? - Posted by Kristine-CA

Real Estate Investing
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Posted by Jim FL on January 06, 2003 at 24:33:59:

Mike,
I don’t know how long this post will last.
Website addresses and links have a tendency to get deleted around here.

However, I am not advertising in anyway, just offering you a clue as to where to find a FREE resource for study.

So, try this:
http://rementors.com/perf_mort_sample.htm

HTH,
Jim FL

2

What about not-getting-the-deed? - Posted by Kristine-CA

Posted by Kristine-CA on January 05, 2003 at 14:33:33:

Happy New Year everyone. I am wondering about the pitfalls of taking control of properties via lease/options. If one doesn’t get the deed, so to speak, but leases the property from the seller, with the right to sub-lease and an option to buy, how does make sure that the owner doesn’t default on the loan, file for bankruptcy, or, I don’t know, die?

And how do you make sure the seller makes their payments,etc? I suppose one could make the payments for the seller, if agreed. But it seems like so many other variables are out of one’s control.

The reason I ask is that I am confident of my abilities to fulfull any lease/obligations I would enter into, with or without a renter or tenant/buyer. But I’m not so sure about taking over payments subject-2, given the dos clause. I’m not asking for any info about the likelihood of lenders calling loans due–that subject has been covered thoroughly here on this board. Just wondering about possible lease/option pitfalls for the lessee–me.

Sincerely, Kristine

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Irrevocable limited POA is good, too. NTXT - Posted by Brent_IL

Posted by Brent_IL on January 05, 2003 at 19:49:39:

.

4

Lots more steps, lot less control - Posted by MoniqueUSA

Posted by MoniqueUSA on January 05, 2003 at 16:49:02:

You’ve outlined several of the risks of buying on L/O:

  • the owner might default on the loan
  • the owner might file for bankruptcy
  • the owner might die
  • the owner might have a judgment against him/her attach to the property
  • the owner might get a new loan that encumbered the house more than your option price (and then not be able to pay the difference when you exercised)
  • the owner might simply refuse to sign the deed when you get ready to exercise your option and now you cannot make good on your obligation to provide clear title (because your Tenant/Buyer is ready to exercise theirs)

These are the reasons why we want total control of the deed. We don’t buy on L/O.
But if you absolutely forced us (by threatening bodily harm) to buy on L/O, we would:

  • Make the payments directly to the lender so the owner cannot get behind on the loan
  • Put the title in Trust and have the Beneficial Interest held in escrow held by a third party, an attorney most likely. This would get the house out of the seller’s name (without violating the DoSC) so judgments would not attach. It would also ensure we could get title when we were ready to exercise our option.
  • We would require that the owner agree to not place any additional loans on the property. This might be enforceable with a performance mortgage, not sure.

I’m sure I’m forgetting some things.

If you can develop a good game plan for options you would have if a loan were to be called due on a Subject To deal, then you’d probably be less interested in buying with L/O.

MoniqueUSA

5

Re: What about not-getting-the-deed? - Posted by Jim FL

Posted by Jim FL on January 05, 2003 at 16:42:42:

Kristine,
There are risks as you know, with EVERY type of deal, and of course ways to minimize those risks.
You have outlined a few of them for lease options.
I’ll try to show you some ways to protect yourself.

You asked:
“how does make sure that the owner doesn’t default on the loan”

REPLY:
Simple, get in writing, permission from the seller to access the account and gather information. Make the monthly payments directly to the lender.
This way YOU know the payments are made and things are current.
Have the seller, or do it yourself, change the address on the account so all mailings and correspondence from the lender get sent to you.

“file for bankruptcy”

REPLY:
If a seller is bent on filing a BK, there really is nothing you can do. There are ways to protect your position somewhat, I’ll cover those down the line here…

“I don’t know, die?”

REPLY:
The agreement is binding, and should the seller die, their estate should have to honor the agreement.
Again, there are things to do in order to secure your position.

In my laymans opinion, there are a few things you should do with EVERY lease option.
Here is a short list:

  1. Get the agreement signed by the seller, and keep the original in YOUR FILES. (I know, DUH, but I’ve seen people NOT do this, beleive it or not?)

  2. Get the seller to sign a deed to be held in escrow, this way if the seller cannot be found later, you can close without them.

  3. Record a performance mortgage. This creates a lien on the property and gives you a way to control things should the seller not perform.

  4. Send payments directly to the lender.

  5. Title search/title insurance.

Although in my opinion, if you want to be TOTALLY secure, a lease option is not the way to go.
I’m sure you know I prefer to buy subject to, because ownership is WAY better than mere control, in my opinion.

Just some things to think about,
Jim FL

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Re: What about not-getting-the-deed? - Posted by Hank

Posted by Hank on January 05, 2003 at 19:47:25:

Jim, how do you sell the whole p-mortgage idea?

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Re: What about not-getting-the-deed? - Posted by Jim FL

Posted by Jim FL on January 05, 2003 at 21:03:56:

Hank,
I don’t sell the idea. The performance mortgage is just “part of the paperwork” with a lease option package.
I do explain that it is a document which gets recorded on public record, insuring that all parties in the agreement perform.
It is really security for both the sellers and I.

Not a big deal, and I do give a copy to the sellers, when we send them copies of the signed paperwork.

Never had a problem getting them signed yet…knock on wood.

Take care,
Jim FL

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Re: What about not-getting-the-deed? - Posted by Mike Scarchilli AZ

Posted by Mike Scarchilli AZ on January 05, 2003 at 23:00:53:

Where could i get a copy of a performance mortgage. Is there a link for a down load? TIA MikeS