Prospect is asking about a lease option

[Anthony Martin]

hiya BP.

So I've been scouring the forums for lease option information. I have two properties  currently and am n the process of finding new tenants as they are both vacant. I had someone email me about doing a lease with the option to buy a few days ago and it hasn't been something I've ever considered.

Little background on the property in question - it was my first primary residence and was purchased with VA financing. I have occupied the house for at least two of the last four years (it was built new in '11) and it also has rental history. It's in a great location, but my biggest problem is that the margins are so tight that it doesn't make me very much of a profit ( maybe $250/mo when occupied) I feel like of I could break even from a sale then I wouldn't be in a bad situation and it would clear up some financing abilities to but another property with better numbers since I've learned a lot more than I knew when I first bought.

So my question is, am I crazy for considering a lease option to get out from under a low performing property? If not, what do I need to start researching and doing to prepare for this situation? Any counsel would be much appreciated!

[Bill Gulley]

Anthony, I doubt, in your case, that Dodd-Frank applies on your first deal but you need to see an attorney outside of JAG as mentioned.

You need to qualify that buyer to ensure they can buy, besides Dodd-Frank there can be predatory sales issues if they can't qualify which is different than if they elect not to buy. Predatory would be putting someone in an L/O that can't qualify over the term, you can avoid that if you can show that they could if they can cure the matter that keeps them from qualifying and that they know what they must do to cure such matters.

You can not require a residential tenant to perform maintenance or be responsible under the lease or any option. You'll be in violation of tax codes. Courts also allow an equitable interest to be gained by a tenant for costs of maintenance.

Do use two separate contracts, charge market rents and don't give credits of payments to the sale price, that constitutes a financing agreement.

An option may not require ANY performance to be required by the optionee (buyer), if you do, like requiring maintenance or paying on a lease as agreed, then you don't have an option and money paid on that contract may defined differently, you may end up returning the option price.

If you lease it, you'll later receive 75% of the rents as an offset to your mortgage debt to qualify on future loans.

There is no issue with a VA loan after one year of occupancy, you can rent it. An option for any term can violate the due on sale clause, you take your chances, the tenant is obligated to pay off the mortgage, you are if it is called. If you fail to pay it off then the optionee has a cause of action against you for failing to keep the property available to sell under the option, they can get their money back. Terms of assumption are described in the note you made, they will need to qualify and that outstanding balance will count against your VA entitlements for another VA loan.

Seems the assumption is to do the L/O, you'd probably be better off selling conventionally and regrouping your investing approach from buying a new home and now that you are more aware of RE.

Tenants do take care of a property they think they are buying, problem is that if they become aware that they can't or won't buy, animosity sets in, they can get more ticked off (at themselves if nothing else) and they can take it out on the property, especially if they feel they were messed over. So, the care given initially can backfire, it can work both ways.

Your property is in its best condition now to be sold than down the road, so if you're inclined to sell, I've always found hanging on doesn't pay off unless you hold for a longer term, 7 to 10 years as your depreciation will play on the future sale.

Can't say what you should do as I don't know enough about your personal position. :)