Lease Option

[Luis Cabus]

Hi all,

I read about lease option and what I understand is the seller's loan is being paid by the renter we put in place for a lease option. My hypothetical question is, what would happen to the loan if the original seller dies? Thanks in advance for expanding my knowledge. 

Luis J Cabus

[Jeffrey S. Breglio]

Both @Darrell Shepherdand @Brian Gibbons have excellent comments. You need to clarify exactly what you are doing with the LO to come up with the best strategy. But to help clarify just a few things...

If you're the "buyer" in the LO and the seller dies, the estate of the seller still must honor your option to buy. If the property is not in some kind a trust, it will require probate to eventually conduct the sale. If it's in a trust, you should be able to avoid that. I say should because heir and beneficiaries can challenge trusts, but that's rare and difficult to do.

In a LO, typically the renter doesn't pay the seller's mortgage. Rent is paid to the seller who then pays their mortgage. You can set up with an escrow company (recommended) to take the rent and then pay the mortgage to make sure it's paid.

If you use an escrow company, I've seen LOs last for years after the seller's death because payments are being made. However, this is risky. Most likely the heirs will notify the bank that the seller has died and then generally the bank will call the note due, which could accelerate the need to exercise your option. If your documents aren't done well, then you could lose your option money and not get the house.

Options are other traditional seller financing deals. The point is, there are a lot of issues to be educated on with LOs, seller financing, and especially when there are underlying mortgages. And, your documents have to be excellent. Keep learning!

Happy investing,

Jeff