Illegal in the State of Colorado?

[Susanna Carbaugh]

Hi all, I'm learning and have not done any deals yet; however, I was chatting with a friend who says that what I'm being taught is illegal in the State of Colorado.

Here's one of the approaches, maybe someone can help/clarify?

Home is over-leveraged, with a value of 200k and a loan of 220k. Payment is current, house in good condition and the monthly payment is $1,450 with 27 years left. I lease option for the loan balance for at least 10 years with rent equaling the monthly payment, starting when I find a tenant buyer. I then locate a buyer and assign my contract with the seller's approval and collect an assignment fee from the buyer.

Or, what about a sandwich lease purchase, where I lease purchase from the seller then turn around and lease purchase to a lease purchase buyer and collect an option deposit?

So confused, and grateful for any thoughts/advice!

[Bill S.]

@Susanna Carbaugh so I will try and address the points your friend made.

Leaving the current mortgage in the sellers name does not mean it's a Installment Land Contract. That is one way that it has been done but it's not the only way. You can also do a wrap mortgage. A wrap is not illegal. There is a law firm in Boulder (Frascona Joiner Goodman & Greenstein PC) they will prepare the documents for a wrap mortgage.

It is absolutely wrong that you can't lease a property that has a mortgage on it. It is done all the time. The "assignment of rents" refers to assigning the rents to mortgage company in the event of default. By this statement your friend discloses that they don't know what they are talking about although they do make some good points.

"treading on a very gray area with the law" can they site the statute? No it's just their opinion.

I don't know if a title company will insure an Installment Land Contract but they will insure a wrap mortgage. The underlying mortgage is just a condition of the policy. You absolutely want title insurance when you do a deal otherwise there could be liens that could cause huge problems. Sellers who are underwater, often have other judgments against them that can get attached to the property.

So the mention about "legally, the deed of trust (mortgage) states you cannot sell the property without the loan being assumed" This is not exactly correct but what your friend is referring to is known as the "due on sale clause". In summary, this clause states the loan must be paid off if the property is sold. It's not "illegal" (you can't go to jail for selling a property with the mortgage remaining in place) to sell and not pay off the property but the clause does give the lender the right to foreclose if the property is sold. This has been discussed a bunch on Bigger Pockets. Just use the search feature in the upper right and corner with the search being "due on sale clause". There are ways to deal with this. You have to figure out if you are comfortable with them.

"Bordering on illegal" while lease options are not main stream, they are not illegal. I think they are generally not advisable in most cases and there can be painful (financially) outcomes but they are not illegal. I don't think they carry near the liability that your friend implies. 

I agree with your friends statement about the classes. It takes a very unique individual to make a living doing lease options. Most people can't make it work.

Your friend's example is probably true but I can't verify it because no name was provided. There were a number of people doing this. The programs I am aware of were not using Installment Land Contracts but were leasing the home back to the former owner. Leasing a home back to an owner occupant who is in foreclosure in Colorado is not advisable. The law was changed significantly and essentially eliminated this practice. It is called equity skimming. 

Just because someone has done lots of deals (I seriously doubt she has done 100,000 deals in 35 years as that is at least 2,500 deals per year or 8 deals per day) doesn't mean they know everything. If you only do cookie cutter then all you see is the same cookies.

Again a wrap is not illegal.

To get a finders fee shown on a closing statement from a title company should mean you have a real estate license. There are ways to get paid from a deal without a license. It's not something I would recommend every day but if you need to make it happen once in a while it can be done. See @Jean Bolger comments on brokering.

Now the big picture. You can do what your training "taught" you but you have some more learning to do to make sure your i's are dotted and your tee's crossed. Get someone who works in our state and does these to help you. Learn from a local attorney that does these kinds of deals. There are only one or two in the whole state that will do them. 

I think what you will find is that it is a tough business. You can sell your approach to folks but in reality, there are very few who it makes sense for. As Jean mentioned, the market is increasing so fast most people can just sell out right. 

There is the whole peril of placing someone in a property that won't qualify for conventional financing. There is a reason for that. What it means is that often they don't perform. If they don't perform that increases the likelihood that someone will complain to the state real estate commission. While what you are doing isn't wrong, it's a lot of brain damage (money too) to deal with a call from these folks.

To make money in real estate with none of your own money is very very difficult. Most people would be better off getting a real estate license and then reading and following Gary Keller and Jay Papason's book The Millionaire Real Estate Agent. I think it would be cheaper, quicker, and more successful (financially) for the average person to follow a conventional path into the real estate business (ie become an agent) than to take an unconventional approach such as lease options.

I had a friend pursue lease options part time (while working a w2 job) for over two years. He did one deal that was a dud and he made no money on it.