Finding Lease Options in Realtor Listings! – Wendy Patton

Wendy Patton talks more about Buying and Selling Real Estate on Lease Options in Indy and elsewhere.  She isn’t trying to sell you guru abilities, she is actually teaching you.

She speaks about talking with Realtors in Indianapolis and elsewhere. How to qualify Realtor listings and educate Realtors about creative selling techniques in Indianapolis and elsewhere.

Over 35 minutes of class time boot legged(not really) from Wendy Pattons’ Buying and Selling Real Estate Boot Camp… People paid thousands of dollars for this bootcamp, and you are getting a taste of it for free!

If you are looking to invest in real estate in Indianapolis or elsewhere, this is some great info!

Wendy Patton Speaks About Lease Options, Contract for deed(land contract), and marketing for buyers and sellers!

Great interview with Wendy Patton talking about lease options, land contracts(contract for deed). Lots of creative ways to purchase and sell real estate in Indianapolis with little to no money down. Also talking about different ways to market for buyers and sellers.

Wendy Patton started out investing in real estate in 1985. She started out using credit cards, and quickly learned that wasn’t the way to go. She has since published 4 major books about real estate investing, and understands how to buy and sell property in Indy with no money down.

Lease-Options or Rent To Own.. How they SHOULD work! Part 2/2

Lee’s Notes: Matthew Griffith, my Indianapolis Real Estate Lawyer, has an interesting article on how to properly do a lease-option/rent to own contract.

Lease-Options

(Part 2 of 2)

In addition to the matters discussed in Part 1 of this 2-part article, the following ideas should be considered by landlords and other parties to lease options:

Analyze the Tax Issues:

All rent received will be income when received. All option fees will be income when received. The profit on the sale typically will be capital gain unless the landlord is a “dealer.” If the landlord provides the financing for the purchase, then the landlord can normally defer most of the income tax to the years in which principal payments are received. However, if the landlord is a “dealer” in this type of property for income tax purposes, then all profits will be taxed at ordinary income tax rates in the year of the closing, not the year when principal payments are received.

No Public Notice of the Option:

The holder of an option to purchase real estate does not own an interest in the property itself, but merely holds a contract right to force the seller to convey the property to the holder of the option according to the terms set forth in the option. Thus, the option should never be recorded and, if the tenant/buyer defaults on the lease, the option should not be discussed in the eviction or damages proceedings.

Close the Sale as Soon as Possible:

A potentially dangerous time for the landlord arises after the tenant has delivered notice of exercising the option and before the closing. This is because the tenant acquires an interest in the property by exercising the option but is supposed to continue paying rent until the closing. Any default under the lease at this time may not be sufficient to terminate the option rights unless the documentation of the transaction is clear. The last thing the landlord wants is to be forced into a superior or circuit court, as opposed to a small claims court, to foreclose or forfeit a tenant who has paid only the option fees, is no longer paying any rent, and is unwilling or unable to close on the purchase. One possible solution to this problem is to include language in the option indicating that the option cannot be exercised or is voided automatically in the event of any default under the lease.

Exit Strategies and Credit Problems:

The transaction documents should describe what will happen if the tenant defaults on the lease, fails to exercise the option, or is unwilling or unable to close on the purchase after exercising the option. If the tenant is to use bank financing, then generally the option fees will be forfeited to the landlord if the tenant does not close on the purchase for any reason. However, if the landlord is providing the financing, another credit report should be required immediately prior to closing as a condition of the financing. If the tenant then does not have good credit, the landlord must have the right to refuse to provide the financing. If the deal then does not close because the tenant is unable to find other financing, the tenant is likely to be very upset unless the tenant clearly understood the risks. Of course, there is nothing to prevent the landlord and tenant from negotiating a new deal if the old one does not close.

Necessary Documents:

The following is a document checklist which the landlord/seller may find useful:

Lease Application

Credit Report, etc.

Employment Verification

Bank Verification

Lease Security Deposit

Lead-based Paint Disclosure

Lead-based Paint Booklet

Seller’s Residential Real Estate Sales Disclosure

Option to Purchase

Sample Purchase Agreement

Sample Warranty Deed

*Sample Note

*Sample Mortgage

Notice by Tenant of Exercise of Option to Purchase

*Second Credit Report

Title insurance commitment

Notice by Owner of Changes in Property Condition

Appraisals, inspection reports, etc., as required by lender

Settlement Statement

Signed and recorded Deed

*Signed Note

*Signed Mortgage

Disclosure of Sales Information

Record Deed and *Mortgage

*Mortgagee’s Title Policy

(*used when landlord is providing financing to tenant)

Conclusion:

In general, lease-options can enable a landlord to sell a property at a price on the high end of fair market value to a buyer who presently does not qualify for third party financing but is likely to qualify after the end of the lease term. The landlord can also collect an option fee at the time the lease is signed and additional option fees during the life of the option. The option fees compensate the landlord for keeping the property off the market during the option term and improve cash flow. The tenant gains access to a property worth purchasing and prepays, essentially, a part of the down payment. This gives the tenant a good reason to remain current on the lease and close on the purchase. As with any complicated transaction, changes in the facts and circumstances of a case will cause the need to alter standard form documents, so be alert to opportunities and call this author if you have any questions.

Lease-Options or Rent To Own.. How they SHOULD work! Part 1/2

Lee’s Notes: Matthew Griffith, my Indianapolis Real Estate Lawyer, has an interesting article on how to properly do a lease-option/rent to own contract.

Lease-Options

(Part 1 of 2)

Recently, the Indianapolis Landlords Association hosted a guest speaker who discussed the many benefits of selling investment real estate by using lease-options, also called “Rent to Buy Agreements.” A lease-option is actually two documents representing two separate transactions: a lease with option to purchase, as discussed in more detail later in this article.

Although there are many advantages to selling investment real estate by use of lease-options, they are not perfect and are often inappropriate. Moreover, the substance of a lease-option is key to completing a transaction to the landlord’s satisfaction and benefit. This article, which comes in two parts, will raise some of the considerations a landlord should make before using lease-options.

Two transactions In One:

A “lease-option” is actually two transactions occurring at the same time. The first is the execution of a standard residential lease. The second is the granting to the tenant of a special option to purchase the property in the future.

Often, the landlord will require an initial option fee for the option, which is in addition to any security deposit or first month’s rent. The monthly rent should be equal to the fair market rent; however, the landlord should charge an additional monthly option fee. The total of the additional option fees should be about the same as the discount given from the future fair market value of the property at closing. This will leave the landlord in financially the same position as if the property were sold at the end of the lease to a third party, but provides incentive to the tenant not to default under the lease and to keep the property in good repair.

For example, if the property is worth $50,000 today and would be worth as much as $55,000 after one year, the deal could be structured as follows:

(a) Lease for one year with rent equal to $500 per month (the market rent); and

(b) Option to be exercised during only the 12th month for a purchase price of $55,000 at closing; an initial option fee of $1,000 and additional option fees of $250 per month.

Only the additional option fees will be applied to the down payment at closing. If the tenant does not purchase the property then all option fees are forfeited.

The tenant/buyer should be better than the typical tenant.

The tenant/buyer should be more creditworthy than a typical tenant and should have a strong desire to purchase the property. The landlord/seller should have a desire to sell the property in the near future. The tenant’s income needs to be higher to support the additional option fees and the tenant will pay more cash up front. Also, the tenant should be required to perform more of the regular maintenance and repair duties than a typical tenant. However, do not expect the tenant/buyer to keep his/her promises to maintain the property. You should inspect the property regularly.

Use separate documents.

A common mistake is to merge the lease, the option, and the purchase agreement into the same “short” form. This can be extremely dangerous for the landlord because it allows the tenant to interpret the lease as a purchase agreement and thus delay or prevent eviction. These problems often arise in the tenant’s bankruptcy.

The option should either include the terms of the purchase or incorporate a separate purchase agreement. The purchase agreement would not be signed, however, until the option is exercised by the tenant. Only the lease and option should be fully executed at the closing, but not the exercise of the option or the purchase agreement. Do not refer to the option in the lease. If the landlord is also going to be financing the tenant’s purchase of the property, then attach forms of the warranty deed, note and mortgage to the purchase agreement. You should also consider using lead-based paint and state-required real estate disclosure forms which would have to be updated at the time the option is exercised and the agreement is actually signed. Land contracts, which are different from lease-option documents, should generally be avoided unless there is insignificant down payment and default by the buyer is expected.

Landlording & Legal Affairs

Landlording & Legal Affairs is a series of articles written by Matthew A. Griffith, an attorney with the Indianapolis law firm of Thrasher Buschmann Griffith & Voelkel, P.C., for consideration by members of the Indianapolis Landlords Association. Mr. Griffith is long-standing member of ILA and is the Legal Affairs Chairman. This article is an overview of the topic and is not to be considered legal advice. Each reader’s particular circumstances will differ. Readers should seek their own legal counsel and should not rely on this article to conduct their affairs.

Lease-option, Rent to own. What does it all mean to a seller?

I did an article for buyers, but is this a very good option for sellers?!? Generally the way a deal works, is that the buyer pays a down payment, rents/leases the home for up to 3 years, and then they have a balloon payment due(rest of the balance). So if a home was 100k, they put 3k down, and make payments for a year, then at the end of the year, they get a loan for 97k+closing costs. Now this could change based off whether or not extra monies are escrowed during the lease, whether you are helping to pay for repairs, etc.

All of the below items of consideration would need to be detailed in the contract(s) you write up with the potential buyer. Get with a tax consultant, and lawyer,etc to make sure you and the buyer are covered.

• Generally you get a bit of cash up front, which is non-refundable. ie.- they pay you 3k up front, and at the end of the lease/rental term, if they decide to not buy, you get to keep the 3k. If they decide to buy the property at the end of the term, you credit them this amount towards their purchase price. Note: you don’t generally have to pay taxes on this money(gain) until the actual closing.
• You get to claim depreciation on the property while they are renting. Talk with a tax consultant, but generally you take the value of the property subtract the land value, and divide by 27.5(years).. the amount calculated is what you can deduct on your taxes. House is worth 250k –  land worth  25k equals 225k, divided by 27.5 equals $8181.82 per year.. and if you are in the 35% tax bracket you saved an additional $2863.64 that year(15% tax bracket = $1227.28)…
• You can write the contract with a non-refundable escrow for the buyers. i.e.-they pay an extra 100 per month, 1 year later, they get $1200 towards downpayment when they go to buy, but if they decide to not buy, then you get to keep the cash(depends on how contract is written).
• You still have to make your payments(if you have a mortgage), pay your taxes(if your buyer isn’t specified to pay them), pay some insurance(structure), etc until the buyer closes on the home. Again, depends on how contract(s) is/are written.
• Depending on how you work the deal, the buyer generally pays for maintenance or repairs, etc. Becareful though, if something goes wrong, the buyer may not have the money to fix it, and it could become a bigger issue down the road.
• You will need to verify your tenant/buyers, or hire a property management company to do it for you. If your deal states you will provide maintenance, and you want property management company to handle it for you, then you will generally pay a fee per month. I generally charge first months rent to find/qualify a tenant, and 10% per month to handle maintenance.
• If home needs repairs, and the buyer completes them. You might get to keep the improvements at the end of the term, if they decide to not exercise their option on the home. Again, depends on how contract(s) is/are written.
• If you have a mortgage on the home, it will still show up on your credit report and affect your debt to earning ration during the term. Check with lenders, the ones I use on Indianapolis Real Estate deals, generally will take your rent/lease contract into consideration at 75% of rent. so if buyer is paying you $1000 p/month in rent, then bank will consider that as $750.00 p/month extra income. This would help your debt to earning ration for buying a different home.

There are a lot of things to consider, but in this market, a lease-option/rent to own, is a very definite option for some sellers who need to sell a home.  Check with professionals to make sure your interests are coveredd.

Rent-to-own, Lease-Option. For a Buyer, what does it all mean?

There are many options for people with poor credit, and a desire to own a home. Many investors throw around terms like Rent-to-own, Lease-Option, but what do they mean?!? First off, a lot of these terms are used interchangeably, and can mean a lot of different things.

Rent to own, lease-option.. There is a couple of ways these work themselves out. 

• Generally there is a NON-REFUNDABLE deposit placed on the home at the onset of the rental/lease. You get 100% credit for the deposit if you close on the home. You lose the deposit, if you do not close on the home.
• Generally, you rent/lease the home for 1-3 years, and then there is a balloon payment due for whatever is owed on the principal. This gives you time to get your credit rating under control, while still getting into a home.
•  Sometimes there is money escrowed from the rent/lease payments you make each month. This escrowed money can then be used towards your downpayment at the end of the lease/rent term. i.e.- if normal rent would be $800 p/month, but you pay $1100 p/month, at the end of a year you would have $3600.00 for a downpayment. Be aware, that sometimes this escrowed money is NON-REFUNDABLE if you decide not to purchase the home.**
• Depending on the contract, you may have to take care of all maintenance, taxes, insurance, etc. It’s going to be your home, better get used to taking care of it now!
• If there is a balloon payment, it will be up to you to get that financing at the end of the rent/lease term. Check to see if there is a prepayment penalty in case you want to close before the rent/lease term is up.
• Generally you will pay a higher interest rate for this option than the banks would charge you. The positive is that you can get into a home before you have cleaned up your credit rating.
• The seller retains title to the property while you are renting/leasing the property.  This could be bad if the seller doesn’t pay taxes, mortgage payments, gets a lien on the property, etc.  Check to make sure your contract(s) are recorded to help stop some of this. Talk to a lawyer to better cover yourself.
• You generally lock in the price of the home at the onset of the rent/lease. In a down market, this could allow you to lock the price in cheap and take advantage of any appreciation in the years you are renting.
• You may be able to assign your contract/option to purchase to someone else. i.e.-sell your deal to someone else. Check to see what your contract allows.

There are quite a few things to watch out for and or think about, but a rent to own or lease-option can get you headed into the right direction. Just make sure to do your research and consult the experts!

** it’s almost always a better deal for you to save your own money, and or get your own loan through traditional means. Sometimes people need to have someone else policing saving and better credit habits.

7 Secrets to Successful – and Legal – Landlording.

Lee’s notes: While some things listed below may not be enforceable against a homeowner renting their own home. We live in a litigious society, I would follow the rules no matter who you are.

1) Run renting like a business. Even if your client is planning to lease only until the house sells, or the tenant is your second cousin, keep leasing on a professional basis. Establishing business rules and policies allows you to maintain objectivity if a tenant makes demands or is late with the rent.

2) Treat Everyone Equally. Federal fair housing law, which prohibits discrimination on the basis of race, color, religion, sex, national origin, family status, or handicap, applies when real estate licensees advertise or lease any residential property. Although it’s completely legal to ask questions about a prospective tenant’s rental history, current employment, and financial history, it’s important to ask every applicant the same questions to avoid the appearance of discrimination. If you have a problem renting to anyone in a protected class, then you should not rent the home.

3) Use the right forms. Although there are all-purposes leases available at office supply stores, it makes more sense to use a lease tailored to your specific property type and state laws, including landlord-tenant laws.

4) Make your lease as specific as possible. Spell out exactly what is expected of the tenant and the owner or manager. Who’s going to mow the lawn? How should emergency repairs be handled?

5) Write out a roadmap for defaults. Your lease should spell out all the particulars and penalties of rent payment. It should state when the rent is due, where it must be paid, what late fees and interest you will charge, and at what point late payments will result in an eviction.

6) Don’t treat security deposits as a potential for profit. Security deposits are intended to cover only repairs needed because of excessive damage to the property. They can’t be used to cover routine cleaning of a unit prior to releasing or to add upgrades. Also remember that in many states, security deposits must be kept in a seperate account and you must pay interest to the tenant. Ask for the first and last month’s rent plus a security deposit.

7) Don’t be fooled by appearances. A fancy car and lots of bling do not necessarily a good tenant make. Run a credit check on every prospective tenant. Tenants must sign an authorization to permit you to check their credit, and you can charge them for the cost. Also remember to keep credit information confidential. Don’t disclose what you know to others.

What are my options if I owe to much on my home.

I see a lot of people who got caught up in the refinance craze. They owe way too much on their home. I end up having to turn them down on listing their home because it is not a win-win situation for both of us.. Sure I would get to put a sign in their yard and get the free advertising, but this really isnt doing the right thing by the client.

Here are some of the options available to people who owe to much but want out of their house. 

1) Put it on the market at the price that is going to net you the amounts you need. – Unfortunately, the odds are that you will be on the market for a while, and this will have a negative impact on your property.

2a) You could go for an option contract – Option contracts usually work on the principle of the person putting money down(ideally 10%) and then paying you a monthly fee for X years(ideally 1 year). Then at the end of the term, they come up with financing for the remainder of the loan. This is pretty much where you are their lender for the term until they can get better financing. 

2b) You agree to a sale price on the home and rent/lease them the house for 1-2 years. At the end of the 1-2 years they have to come up with financing to buy the home. You keep the rent/lease payments they made over the past 1-2 years, and they come up with a loan for the full amount at the end of the term. Good for them, because they will hopefully take advantage of the appreciation of the property. Good for you if at the end of the term they decide to go elsewhere, you get to reap the benefits of the appreciation and you hopefully got a bit of extra cash each month over the term. 

Side note: in both 2a and 2b, you could raise the rents and create a downpayment fund for the buyer. Say if you would normally lease for $1000 p/month. You increase the rent to $1200 p/mnth and at the end of the term you would give them the money back towards a downpayment(1 year = $2400, etc). You could keep the interest, and this helps people who could never build up a downpayment on their own.

2c) You rent the house out. This is the least favorable of the 3 options, because your tenants really have no interest in the home, nor do they have an investment in it.

Depending on where your home is, you may be able to apply for section 8 housing, which is a qualification where the govt guarantees rent for low income housing.  I am not versed in how section 8 works. You would need to go to the source to find out how section 8 works. I have heard a rumor that if the tenant causes damage to the house, then the govt will pay for repairs, but I dont know how true that rumor is.

3) Stay in the house and put as much money as is possible each month towards your principal.

4) Try and work a short sale with the bank, or go into foreclosure on the house – Unfortunately, This can hurt your credit rating for 3+ years depending on the lender.  Be aware, some lenders consider a short sale the same thing as a foreclosure.

As to what lenders think about renting/leasing: If you have a signed documented lease, most mortgage companies will consider that as income, and loan accordingly. The lender I spoke with stated that if you were renting/leasing the house then they would consider that when it came time to finance your next home.. Basically, they take 75% of the monthly payment you are collecting and put that against your first and second mortgage payments. So if 75% of what you are charging for rent is equal to what your existing first and second mortgage payments are, you would have nullified that payment out of your budget..

There is one caveat, and that is if you currently have a FHA or VA loan on your home, you would not be able to get another FHA or VA loan on the new home.. Hope that makes sense.

Hopefully the above info is helpful. Obviously each situation is different. You will need to analyze your own situation and come up with the best solution.