lease-option a power of sale house

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lease-option a power of sale house

Matt Geerts
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes

Does this work?

Find a vacant house and contact owners.

They've been kicked out by the bank under power of sale.

I feel that the house is worth 150k as-is, 10k in updates (not big repairs) could make it fit into the 190k market comparables.

Owners owe 110 on mortgage and 15k in recovery costs, 3 years left in term.

I write up a lease-option contract with the owners where I pay them a 15k down payment (to knock off the recovery costs) and "rent" the house from them for the costs of the mortgage plus taxes, taking responsibility for the utilities (effectively $0 cash flow for them). I will pay the remainder of their mortgage at the end of the 3-year term.

I then rent out the property at a profit, and when it comes time to buy the house I pony up whatever's missing from a 20% down payment, then immediately call up a bank to get a refinance, which takes my money out of it.

I've totally made up these numbers so please don't waste your time analyzing the math. I'm just wondering if this concept is workable or if there are blocks in the banking system from this type of deal. 

Can the previous owner lease-option without triggering due on sale? 

Can they simply pay back the back-payments and carry on with their 3-year term without resistance from the bank?

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y

Sounds like a lot of risk just for the option to buy.  I wouldn't do something like this without owning.  Sandwich leases carry TB non-payment and management risk as well.

When you 'call up the bank', it will be for a purchase, not refi.  Have to own it first to refi.  Maybe I misunderstood?

Keep those creative juices flowing though @Matt Geerts.  Lease options work great for pretty houses with low equity where the owners are current but  have an immediate pain point.  Cheers!

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    Also, is there any way to take a guess at what the back payments would be without calling the bank? Of course, given that the previous owners tell me their rate, ammort, remaining term, payments and how long they've been without paying the bills.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    Sounds like a lot of risk just for the option to buy.  I wouldn't do something like this without owning.  Sandwich leases carry TB non-payment and management risk as well.

    When you 'call up the bank', it will be for a purchase, not refi.  Have to own it first to refi.  Maybe I misunderstood?

    Keep those creative juices flowing though @Matt Geerts.  Lease options work great for pretty houses with low equity where the owners are current but  have an immediate pain point.  Cheers!

    1Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    @Matt Geerts,

    Sounds like you are describing a property that's somewhere in the foreclosure process (is that what you mean by "power of sale"?).

    If the evictees would share their bank statements or check register with you, you could find where they stopped paying.

    It would likely be up to the bank if they'd accept the back payments, depending where the property is in the foreclosure process. If they've already evicted the borrowers, it's a good bet they'd say no.

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    @Steve Vaughan thanks for the info. I would intend to complete the lease option at the agreed price, buying the house at a steep discount to market. This would require 20% of purchase price (including the option fee at the start). Then I'd immediately refinance it based on appraised value at 80%LTV, which would get all of my money out (and possible more).

    @David Dachtera We don't do foreclosures here in Ontario. Power of sale is a different process. The owner owns it until the trustee completes the sale. Until the new buyer has the keys in their hand the previous owner can stop the sale by paying up (including fees and penalties to pay for the marketting, legal, etc)

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    @Matt Geerts,

    Might not be called foreclosure, but that's how it works here in The States.

    The lender can file a Notice of Default or Lis Pendens, then schedule an auction sale per the law. The current owner can make up the back payments and stop the foreclosure up until the auction sale. After that, they've lost their rights to possess and face eviction if they don't vacate voluntarily.

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    We're veering off the topic of my original question here but they are slightly different:

    http://www.canadianmortgageadvisor.ca/resources/fo...

    Some Canadian provinces use power of sale, others use foreclosure. Usually PoS is for the more liberal provinces, I believe. 

    Anyway, the important point is that I'd like to pay their arrears as an option fee, and then their mortgage/taxes as the lease (direct to the city/lender), then close at the cost of their balance and refi when the time comes (oh yeah, there's another difference, we don't do 30 year terms in Canada. We can do a 30 year ammort, but the terms are generally 2, 3 or more popularly 5 year then it must be renewed).

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    get on the deed while curing a note, buy the property subject to the existing financing

    Now you are the owner

    But I never buy and lease back

    Get vacant possession 

    @Roy N.

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    @Brian Gibbons thanks for responding. Based on what I know (admittedly little) I'd prefer the lease-option redemption method because I'm not playing the much-debated (and it won't be debated in this thread) sub2 risk. The people are already locked out of the house and I'm not in the business of renting to people who can't' afford it, so renting back to them is not going to happen (if that's what you meant).

    I notice your tag didn't work, so @Roy N.

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    @Roy N. Is a respected Canadian REI, I would follow his advice.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Matt Geerts

    Interesting idea, though a little risky.  That said it's unlikely to get play as lenders and their trustees are pretty rigid in their approach to things.   But, you can always ask.

    In addition to the 15K in assorted penalties and fees you will find likely find 6 - 9 months of mortgage arrears.   If it is is early in the process - as with a deal in which I am presently involved - the owner may be able to convince the lender to rescind some of the penalties if they bring the mortgage current and demonstrate they have a firm sale or the means to continue making their mortgage payments.  The penalties are the owner's problem, so I wouldn't concern myself with them.

    The lender is not going to be party to a lease option and you are likely too far down the road to assume the mortgage (if that was ever a possibility).   In these situations, if you have a Vendor who wishes to preserve her/his credit, and has the means to cover the shortfall between a low sales price and what is owed the lender, you may get a good deal.   It does not sound like you have such a Vendor, so you would be better off waiting for the auction - or for the property to fail at auction and be listed by the lender.

    If you are intent on trying your experiment, before wading deeper in the weeds , determine if the owner/borrower waived their right of redemption {if that is permitted in Ontario} or is past the redemption date?  If so, you are likely dead in the water or, at the very least your objective just became more difficult to reach.  Once you are that far along into the process (just weeks away from auction), the lender may not accept payout from the borrower. 

    @David Dachtera  - Power of Sale is somewhat different than foreclosure - it's non-judicial (no going before the courts, but there is still a regulated process to follow) and generally faster from start to finish.   It is beneficial to lenders  as they do not have to take ownership of the property, but can force the owner to sell it.   Furthermore, if the property sells for less than the outstanding arrears, the borrower is still on the hook for the difference.  Conversely, if it sells for more, the surplus goes to the borrower.

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    Thanks a bunch, Roy. No auctions here, it just goes to MLS with a realtor. The only time I have ever seen a property at auction it was inherited and being dumped by the kids.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y
    Originally posted by @Matt Geerts:

    Thanks a bunch, Roy. No auctions here, it just goes to MLS with a realtor. The only time I have ever seen a property at auction it was inherited and being dumped by the kids.

    If you find the Notice of Sale in the local paper or the Ontario Gazette, it will most likely contain a date, time and location where the property be sold at public auction.  At the auction the trustee's agent will announce the property at an upset price (usually whatever is owned plus penalties, but I've seen them start higher).

    If a bid higher than the upset price is not received, then the lender will withdraw the property and sell it via a real estate agent on MLS. Unless in a really tight market, you are more likely to get a better deal once the property has gone to a real estate agent (particularly if you are on their pocket list). In a tight market, you do better by finding the borrower / owner before the end of the redemption period and working with them to save their credit, while you obtain a favourable price on the property.

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    Thanks Roy. I have only ever seen tax sales in the Ontario Gazette, I had no idea that mortgage defaults were listed there.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Matt Geerts

    It's not the default that is listed.  It's a public announcement of the auction - required by the legislation.

    You just jostled something deep in the back of my mind.  I think they may be in a another publication / other publications in Ontario ...

    In NB they are listed in the Royal Gazette (there are only ever 3 - 6 per week).

    Perhaps @Claude Boiron has the answer more readily accessible? 

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  • Andy Welmers
    Ottawa, Ontario · Member since 2016 · 43 posts · 5 votes
    10y

    @Matt Geerts Is there a reason you cannot assume the mortgage? @Roy N. When mortgage goes "go to far down the road"? If lenders want the mortgage to get back in good standing, if someone were to pay the fees and penalties, and take over the mortgage ensuring payment, with good credit rating (essentially what Matt is proposing), why would the banks reject this? The lease option seems a much riskier venture to me.

    Putting an "option" is not a guarantee to sell. 'Renting' and removing the home owner from the premise would seem riskier than having an other party completely take over the mortgage and remove the home owner, which defaulted, from the picture.

    With assumption of the mortgage, could you bypass the 20%? as the typical mortgage in Canada would have more than 20% equity in the property (less distress) unless it was a high ratio. Defaulting after 2 years is possible in that case, but then the mortgage is insured. Is there any incentive for the banks to work with you at that point?

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    I don't know all the details, but mortgages have generally be written as unassumable since the 80's and the idea is generally stonewalled at the bank. I think 99% of bankers' though process goes "That's not what I do every day, therefore I will deny it is possible".

    Perhaps someone could shine a light on why my lease-option idea is any riskier. If it all seriously goes to hell I can just walk away from my option. And yes, if I have an option registered on title they can't sell it to anybody until I waive the option. It is a guarantee to let me buy it if I want to at the agreed price. 

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Andy Welmers

    When the power of sale process has gotten too far down the road, the borrower has typically waived his/her right of redemption or the redemption period deadline is in the rearview mirror. The lender has obtained a writ of possession and has committed to seeing the property through to sale. They also have a fiscal obligation to sell the property at FMV - which would preclude them cutting a deal with you at the back door (if for no other reason then optics).

    There are still a number of lenders "marketing" financing that is assumable and portable, but in practice it seems these can only be assumed in those instances where the person applying to assume the financing will be an owner occupant.

    As a buyer, when I am dancing with an owner/borrower on the precipice of a mortgage sale, I generally have no interested in trying to assume the existing mortgage as I am planning to pay less than this for the property.

    As to your last question, when assuming a mortgage, the lender will still qualify you as if you were purchasing the property. So if the appraised value of the property has declined to the point where the mortgage balance is >80%LTV, you would have to bring it on-side at Close.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y
    Originally posted by @Matt Geerts:

    Perhaps someone could shine a light on why my lease-option idea is any riskier. If it all seriously goes to hell I can just walk away from my option. And yes, if I have an option registered on title they can't sell it to anybody until I waive the option. It is a guarantee to let me buy it if I want to at the agreed price. 

    That is precisely why it is riskier from the lender's perspective (remember this vendor is in, or past,  a pre-sale redemption period) and why they are not going to be warm and fuzzy about it.

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    So, the risk is the lender's, or mine?

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y
    Originally posted by @Matt Geerts:

    So, the risk is the lender's, or mine?

     You both have risk ... but they care nothing about yours.  Lenders are risk adverse creatures.  Since they are familiar and at peace with the Power of Sale scenario, why take a chance on a Flying Dutchman?

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  • Matt Geerts
    OP
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    I should hope they're not racist. :D

    They don't have a choice. If the current owner gets their money in, the power of sale stops. At that point I have a lease-option agreement on title. What control do they have, and what risk do I have?

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    you do not OWN anything if you cure the note and do a lease option.  There are consumer protection's for the owner if they want to bring a case against you for a sale leaseback.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Matt Geerts

    I hear what you are saying, which brings us full circle to my first post - make certain the borrower/owner still has the right of redemption.

    You may have an option and you may register it ... which should not bother the lender terribly, but could.

    However, as Brian says, you have an option agreement, but no ownership.  The owner is still in control of the property and you need to depend upon him/her to a certain degree.

    BTW:  If you ever sit down to read the 50 or so pages of your typical mortgage agreement, you will see the lender (particularly the big five) have lots of choices ... they just seldom chose to exercise most of them.

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