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Here are some practical tips I have learned from doing lease
options over the past 20 years. Lease options are great,
except when the seller decides not to live up to their end
of the bargain.
Sure, you can always sue the seller to force them to sell
you the property, but this can cost you thousands of dollars
in legal fees and take years to accomplish in our over
saturated legal system. You always need to position yourself
in a better position if you want your option to be
protected. Here are three good ways to protect your option:
1. Record the option. If your option was signed
before a notary, you can record your option in the public
real estate records. This will give the world public notice
of your interest. If the option was not notarized, you can
sign an affidavit called a "memorandum of option" and file
it at the Registry of Deeds in your county. Keep in mind
that this does not create a lien, it only creates a "cloud"
on the title do the owner can not sell it from under you.
2. Escrow the deed. If your seller has died or
disappeared, you will have a big problem getting him to sign
a deed. An escrow should be created up front in which a
title company or attorney holds an executed deed. When you
are ready to exercise, you simply tender the money to the
escrow agent (which can be your or the owner’s attorney) and
collect the deed.
3. Record a mortgage. Typically a mortgage is
recorded to secure payments on a promissory note. A mortgage
can be recorded to secure performance of any agreement, even
a purchase option. You as optionee (buyer) will now be a
lien holder, in the same position as a secured lender. If
the seller refuses to sell the property, you foreclose. Now
the SELLER has to go to court to protect himself, rather
than the other way around.
Here are some
tips to prevent a tenant from asserting equitable mortgage.
On paper you should make everything look like a landlord
tenant relationship, but you operate the transaction like a
Buyer – Seller relationship.
1. Use separate agreements. Give your tenant a lease
and a separate option agreement. Make certain the lease does
not refer to the option. More than 75% of the time, the
tenant loses his paperwork. You don't show any option
agreement to the court until the judge asks for it.
2. Keep your term short. Do not give tenants more
than a one-year lease option at a time. If the tenant
insists on three years, give him a one year with two rights
to renew. Draw up brand new leases and option agreements
each time he renews. If you give a cumulative rent credit,
raise the purchase price each time.
3. Take a security deposit. Sellers don't take
security deposits, landlords do. Make it look like a
landlord/tenant relationship, even if the security deposit
is small.
4. Make sure you pay the taxes and insurance. Do not
let the tenant pay the taxes and insurance. This makes it
look like a sale.
5. Don't give large rent credits. The more "equity"
the tenant has, the more likely a judge will favor an
equitable interest assertion. My rule of thumb is that if
you choose to give a “rent credit”, it should never exceed
35%. I know many gurus tell you to give 50% or more in rent
credit, but I believe that the more rent credit you give the
more equitable interest exposure you create for yourself.
I hope
these tips help you on your next lease option transaction.
"You are who you are and where you are because of what you
have put into your mind."
For more information or pricing please do not hesitate to
call or e-mail. I can be reached at (508) 595-9567.
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