Recently I was talking to a potential client who was wondering if there was any way I could help rescue his lease option tenants. Last year, he had done a lease option on one of his rentals with a nice couple who put down a healthy option payment.
This year, his financial affairs are forcing him to file for bankruptcy, and the BK trustee is going to sell that rental right out from under the nice couple with the lease option. So, unless they have a way of getting either cash or a bank loan, and can buy the property from the BK trustee, they are going to lose everything…
Their option money, and the chance to own a
property they’ve put a lot of time, money and love into.
The seller feels bad, but there’s nothing he can do. He can refund their option money, or find them a replacement property, but as he’s in the position of filing for bankruptcy, there’s very little chance that he has the money to do either. The nice little couple is out of luck.
With all of the ‘reorganizing’ of people’s financial lives right now, there are a lot of BK’s, liens and judgments flying around that can easily attach to a piece of property, changing everything.
Besides that… with the uncertainty of the real estate market, a lot of agents I know who used to feel good about putting their clients into lease options now consider it a bad move for their clients, and one that represents unacceptable liability that could come back to haunt them…
If you were the one representing that nice couple, and you got them into that lease option that went south, wouldn’t you be a little bit worried when they called you after finding out they were losing their entire investment?
And even if nothing like that happened, in many areas, it’s likely that home values will be below the strike price, making it financially unsound to exercise the option that they spent their hard-earned money for.
So… what are the options?
If you have at least a 5% down payment, see if the seller will sell to you in a straight owner carry transaction, with a note and deed of trust or mortgage . That way, title is in your name, and shrapnel from the seller’s exploding financial world won’t embed itself into your life and real estate holdings.
Alternatively, have the seller place their property into a land trust and become co-beneficiaries with them in the trust. There are many benefits of using the land trust:
- protect the title from liens, judgments, bankruptcies, probate and divorce issues
- protect any existing financing against acceleration
- privacy of ownership and potential tax benefits
- get sellers to agree to take a small amt of money up front, because they don’t have exposure to foreclosure
You get the benefits of ownership without many of the risks. And fewer risks for buyers means less liability for the real estate professional working with clients who are looking for lease option or owner financing opportunities.
Think twice before you get into a lease option, or put your clients into one.
From the buyer’s perspective, (and often the seller’s) owner financing, and/or the intelligent use of land trusts offers more benefits and fewer risks.