Lease purchase to buy investment property?

Question

I was approached by a homeowner who wants to sell her house off market. I do not have the liquidity to buy it outright at the moment, but expect to be able to do so in a couple of years. I first thought about "subject to" deal, but I am not comfortable with the risk of the "due on sale" clause. So I am now thinking of a way to use a lease purchase instead. Assuming a sale price of $95k and current mortgage amount of 80k, I plan to structure it like this:

Lease option fee paid to the seller: $15k (equal to their equity)

Monthly payment: equal to the mortgage payment (I plan to pay the bank directly)

Purchase price: the payoff amount at the time of the purchase ($80k minus whatever principal was paid down)

This way, the seller gets their equity and gets rid of the mortgage payment. I get to rehab the property and rent it out (sublet).

My concern is, how do I prevent the seller from taking a HELOC or something without my permission? Can I record a lien based on the lease purchase agreement?

Any thoughts and advice would be appreciated.

Jeff Rabinowitz · Answer

It could, if the bank wished to pursue that. It is certainly something my buyer and I have considered. I think it is unlikely to happen as the bank will receive every payment on time (I am continuing to make the payments as I always have) but the buyer and I  have the resources and the experience to handle the situation if the bank did decide to call the loan due.

Jeff Rabinowitz · Answer

State law varies and I am not a lawyer--it is best to get a local legal opinion. I have sold houses on land contract to other investors which had existing mortgages. The investor made a down payment and agreed to pay me enough to cover the mortgage payment plus the interest on the balance of the purchase. To protect the buyer we recorded a memorandum of land contract. There should be a similar document you could file--it may be called something like a memorandum of interest. This memorandum should cloud the title and should be easily discovered should the seller attempt to refinance the property or get a HELOC.

Rumen Mladenov · Answer

Thanks @Brian Gibbons. My concern with Sub 2 is the possibility of the "due on sale" clause being triggered before I am able to pay off the balance. The seller had their mortgage modified, not sure if that increases or reduces the risk... Lender is JPMorgan Chase.

Brian Gibbons · Answer

You want to get on title.

Sub2 is strongest.  Then Land Contract.

Sub2 and note is what I would do.

Download Agreement of Sale - Realtor DE

http://www.delawarerealtor.com/images/AGREEMENT_OF...

@Rumen Mladenov

Julia Shevchenko · Answer

Both strategies sound like a good fit. Triggering a "due on sale" clause while making all payments is about a 2% chance. But in both cases, the "interest" would be recorded by a notary and with the county. Look up purchase option vs right of first refusal. One might be better for you than the other, and I would definitely ask an attorney and a REI mentor for details. Good luck, and give us an update on how you closed it.

Justin Smith · Answer

@Brian Gibbons

If the seller transfers property into a land trust, makes you the trustee, and then transfers their beneficiary interest to you, are there any issues that could come up when you try to get the insurance in your name and take the seller's name off the insurance?  And how would you go about paying the taxes?  And, what additional steps do you have to take to pay the lender directly?

Justin Smith · Answer

Giving someone an option to purchase also gives the lender the right to accelerate the loan.  I'm not sure how the lender would be alerted to the fact that the seller gave you an option to purchase, though; even if the option was recorded.

Brian Gibbons · Answer

@Rumen Mladenov

The language "triggers the due on sale clause" is not quite accurate.

Buying Sub2 is common in real estate investing, I have 30 years experience doing them.

IMHO, if the loan is paid on time, and the insurance is in force, the lender has a "performing asset".  Why would they call the loan due?

Chris Majors · Answer

I agree with @Brian Gibbons

Get it subject-to.  You need the title in your name.  Seek legal advice, but I believe a land contract also triggers due-on-sale clauses, or at least that is what I've been advised in GA.

Joel Fischer · Answer

I'm only a newbie but your 15K lease option fee seems high.  In deals I've seen it's usually something like 2-3K.

Lease purchase to buy investment property?

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