What Type of Account for Option Money - Posted by Anthony

Posted by KennS on November 06, 2000 at 14:02:15:

Seperate accounts for each contract.
Good Luck.

What Type of Account for Option Money - Posted by Anthony

Posted by Anthony on November 06, 2000 at 09:22:26:

I am trying to put my first L/O together, I have a client that is willing to put $3000 up for the option to purchase a house for $70,000. I have read several courses and all of the info on this site and nobody tells you what to specifically do with the option money. Does it have to go into an escrow account or is it my money to play with until they exercise the option. How do I show this money to a mortgage company as a down payment when they apply for a mortgage or does it just come off the top of the purchase price. I need help with this soon, she wants to fill out a rental application later this week. Thanks.

Re: What Type of Account for Option Money - Posted by Hope(Fl)

Posted by Hope(Fl) on November 06, 2000 at 12:49:35:

Option Money that we collect is NON REFUNDABLE and so it is ours to do with as we please. I do not put it into any type of escrow fund at all. It is wise to advise the tenants that they should pay by check or mo. so they can have proof that they did pay this money when and if they apply for a loan. We do not take the option money off the price of the house, we say it is to be used toward the down payment. This is how we do it, it is real simple and it works for us!!

Re: What Type of Account for Option Money - Posted by KennS

Posted by KennS on November 06, 2000 at 09:57:34:

I know other people do it different, but here is how I do it:

  1. If I collect any option money, that goes into my pocket and is not considered down payment (I usually take maybe $10 for the option).
  2. I require Earnest Money, usually a few thousand, that IS considered part of the down payment.
  3. I use Stewart Title account servicing. They charge $60 set-up fee and a couple dollars a month (buyer pays for both). The earnest money is deposited here.
  4. Stewart Title sends them a payment coupon book and they receive the money, they hold onto the Rent Credits,and they send me my portion of the check every month.
  5. I don’t need to hear from the tenant/buyer until they exercise the option and it is time to close.
  6. I have it written in my contract that the Servicing Escrow account belongs to me and that I will “Gift” it to the buyer ONLY to be used towards their down payment if they exercise the option. If not, the funds are released to me and the account is closed.

This has worked great for me. Lendors like it and tenants (and their attornies) find it a very fair.
I just closed on one last week.
I also get a 35% discount from Stewart Title.

  • Kenn

Re: What Type of Account for Option Money - Posted by JPiper

Posted by JPiper on November 08, 2000 at 01:07:54:

If I were a lender I would like your idea.

On the other hand, the downside of your method is that it goes along ways toward establishing an equitable title claim for the tenant, in the event that your deal possible should unravel or the tenant fails to obtain financing.

My guess is that a sharp attorney could further restrict the distribution of money held at the title company.

Know that I have not read your contracts so I’m clearly at a disadvantage. So take it for what it’s worth. But the term “earnest money” carries a specific meaning. Try telling a judge at an eviction hearing that it was “just a rental” when “earnest money” was involved. Money held at a title company despite the name it is held under may well be restricted if a dispute arises…the title company may not want to take a “chance”.

Even the IRS may view your transaction with different eyes, and possible treat it as a sale rather than a rental (if they audit you).

Be careful…the lender isn’t the only party to satisfy here. Your risks need to be carefully evaluated.


Answer to Email I received - Posted by KennS

Posted by KennS on November 06, 2000 at 18:15:15:

First, you need to understand that I own the properties. Also, I do not lease-option a property that I have owned for less than one year.
I am not sure if you’re doing a sandwich L/O or if you already own the property.

I use the title company’s account servicing for a few reasons:

  1. It projects a more professional image to the tenant/buyer and they feel more comfortable buying a house in this way. The extreme opposite would be if I asked for everything in small unmarked bills.

  2. Under my agreement, the tenant does all repairs, etc. just as though they are the owners. When I get the paperwork signed, I shake their hand and tell them “good luck in the future. It was nice doing business with you. Maybe I’ll see you at the closing”. This set’s the tone for our relationship. I have never received one call about a repair or anything else for that matter.

  3. When my tenant/buyer goes out and gets a loan, their lendor is bothering the title company for payment records, escrow balances etc.
    Not only do I not have to deal with it, but their lendor feels more comfortable with our terms. So far, they have never even questioned the rent credits/earnest money being used towards the deposit.

I would suggest you contact Ed Garcia concerning your seasoning questions.

  • Kenn

Re: What Type of Account for Option Money - Posted by BradSC

Posted by BradSC on November 06, 2000 at 11:24:56:

Hey Kenn, thanks for the info. One question tho. Will the one acct. with that title servicing co. handle all of your earnest money, or is something different required for each t/b?? I’d also like to know how the pros in my area handle their earnest deposits. I’m about to get off of the fence here in the Charlotte, NC area. Thanks for any and all replies.


Re: What Type of Account for Option Money - Posted by KennS

Posted by KennS on November 09, 2000 at 11:00:17:

Yes, anyone selling on a lease-option needs to make absolutely sure the contract is done correctly.
My contract (20 page) is rock solid.

Here are a few sections FYI:

… 4.Escrow Account. Upon execution of this Agreement, Lessee will establish an escrow account in the name of Lessor, and Lessee will be responsible for all set-up and maintenance fees of this account. Lessee?s initial security deposit of TWO THOUSAND AND 00/100 ($2,000.00) DOLLARS will be deposited in this account, and Lessee?s monthly payments will be processed through this account.

… For each month in which rent is paid on time pursuant to Paragraph 5, TWO HUNDRED FIFTY AND 00/100 ($250.00) DOLLARS will be held in the escrow account established pursuant to Paragraph 4 of this Agreement. Should Lessee exercise its option to purchase the property in accordance with the provisions hereof, Lessors agree that the balance currently in said escrow account on the date of closing will be given to Lessee to be applied to the downpayment on the purchase of the property.

If the Lessee does not fulfill the terms of the lease agreement, and/or does not close on the purchase of the home by September 30, 2001, the balance in said escrow account will be released to Lessor, and the account will be closed. Said account shall be the property of Lessor and Lessee shall have no rights in said other than the rights herein provided.

… In the case of a default and/or eviction under the terms of this Agreement, this Lease is not an ?Equitable Mortgage? and cannot be construed as an installment land contract nor can the balance in the aforementioned escrow account be construed as equity and/or an equity position in the property.

  • Kenn