All Forum Posts by: Keith Barton

David Janash
You take your risks and hope the bank doesn't bother with calling a note due because the interest rates are low. If the rates climb, it will profit banks to call notes due, and we might see that happen. Only time will tell.

In the alternative, you get financing through the LLC.

John Jackson
Interesting - re: your title searches and the note being called due.

I always tell my clients that the lease-option is enough to trigger the due on sale clause; I tell them I have no way to guage the liklihood of the bank calling the note due (but, that whatever the liklihood is now, it will be more likely as the interest rates climb); and, I always put a clause in the agreement that the optionee is put on notice that the bank may call the note due even if all payments on the mortgage are current, and the optionee's only remedy at that point is to exercise the option and close before the bank takes it in a foreclosure action.

Bill Gulley
I recommend to my seller clients that they charge extra for rent under a lease-option. One nice thing about using an attorney for lease-option deals is that the attorney can use their trust account to escrow the amount of the rent being credited toward the downpayment on the property. At the time the option is exercised (if it is) it can be used as cash on hand by the optionee. If the option is not exercised, it gets paid out to the seller (as the rent credited is not refundable to optionee)....

@Tim Phun
Any transfer of ownership interest in the mortgaged property (& transferring to an LLC constitutes a transfer of ownership interest) allows the bank to call the note due if it wants.

According to the information I read (as little as it was) a B-Corp is not actually a business entity type. It is simply a private certification for a non-profit, which means the non-profit meets certain standards in its operations. Does this have value - maybe, does for a larger organization....

Steven Hamilton II
Do you do any Form 990 returns? Wouldn't your example disqualify the organization from continuing to qualify as having full 501(c)(3) status? Wouldn't the IRS downgrade such an organization to a private foundation at best, and who knows what at worst? Mom & Dad wouldn't get a tax deduction for the donation; and, depending on what else was going on - the IRS might do something more nasty.

David Janash
Other than debt to income ratio - you will be limited by how many loans you have outstanding. Banks will only let you have so many consumer mortgages before they refuse to loan you any more money.

If you want more than a handful of single family homes, you'll need to find other ways to fund your deals. You get more bang for your buck (although there's more pucker factor for a newbie) if you buy multi-family units (the more units the better - all other things being equal). Cash flow should be better, the loss of any given tenant has a less devastating impact to cash flow, work per unit will be less (e.g., one building with 4, 6, 8... units will be much less work than 4, 6, or 8 single family homes).

Loans will be on your credit report for as long as the loan isn't paid. A bank will loan money to an LLC, and then demand a personal guarantee from you. Therefore, you'll still have loans on your credit report - unless your LLC is big enough and wealthy enough for the bank to forego a personal guarantee.

I'm curious to know if anyone has disputed the assessed value of a property such as this; and, what the outcome was.

Have you gone to your JAG office to see how much information they can give you?

2 issues to look into:
1) Nobody on this forum can tell you what your mortgage says. Find it, read it, if you still have questions about a particular clause, feel free to ask specific questions about specific language; however, just because someone offers an opinion - it doesn't mean the opinion is right.

2) Look through your condominium governing documents to see what, if any, restrictions are placed on renting your condo.

Brian Gibbons
Equitable Conversion - some jurisdictions consider a lease option agreement to be an equitable conversion and some jurisdictions do not. An equitable conversion means the optionee/tenant owns an equitable interest in the property. This is enough to trigger the due on sale clause of a mortgage, and it is enough to potentially really screw up insurance payouts if the parties don't understand how the courts will determine who gets insurance proceeds if anything happens to the property.

I do not know (one way or the other, as I've not taken the time to research) whether the process you label "Contract for Option to Purchase and a Lease" avoids transfering an equitable interest in jurisdictions that consider lease option agreements to be an equitable conversion.

Bill Gulley
Jurisdictions vary of course... But...
1) Option agreement and Lease agreement together or not?
Your statements:
"In NO situation, should an option be included in one document with a lease, any lease-option arrangement should be under seperate agreements....

[Combining option and lease together in same document] serves no unique function that would not be accomplished with two agreements."

I disagree. In Ohio at least, I think it works to the advantage of the seller if the lease and the option are in the same document. There can be a difference in how a lease and option in separate documents are interpreted as compared to how a lease and option in the same document is interpreted (more details below).

2) Consideration
Your statement enumerating consideration:
"For and in consideration of Ten Dollars and the love and affection of my children...." This is sufficient consideration when a parent is transfering property to more than one child, but this would not work for anything other than that. I just wanted to clarify that so nobody used that phrase inappropriately :)

3) Option Terminated for Tenant's Default
This is another matter that varies by jurisdiction, but there are jurisdictions in which the seller can prevent the tenant from exercising the option if the tenant is in default on the lease. Ohio is one such jurisdiction, and this is why I draft single document lease-option contracts for my landlord clients. Combining the lease agreement and the option agreement (together with the proper language) strengthens the seller's right to prevent the option from going through. The ability to do this does not mean this is not an option contract. There are conditions precedent that must be satisfied for the option to be exercised. These conditions precedent constitute consideration that is in addition to the option price (the non-refundable payment for the purchase of the option).

4) Locking-up the property
I think this is just a matter of semantics - the end result is the same - the optionee can purchase the property from the owner. However, it IS a good idea to mention what you mentioned. You are right that many probably do not realize that the property can be transfered and the new owner will be obligated to sell if the optionee exercises the option.

Brian Gibbons
Can you elaborate on your
"Contract for Option to Purchase and a Lease"? I'm not seeing how this arrangement does not transfer an equitable interest in a property, but maybe I don't understand enoungh of the details of this deal.

Bill Gulley
Just a minor clarification:

"Another issue is that many talk about using an Option to lock up a property thinking it can't be sold. Actually, an Option is a deed restriction, a contingency that the title holder may be obligated to sell. A property with an outstanding open option can be sold to another party at any time over the option term, but is sold with the option in force. Those wondering about title insurance requirements, the property is sold with the cloud on title and is excepted from coverage, similar to a Sub-to transaction with existing liens. "

The Option needs to be recorded (either the actual option or a notice of option) before the option serves as restriction on the deed. You did mention filing the notice of option 2 paragraphs after the paragraph I quoted, but I just wanted to clarify that the option must be recorded to restrict the deed. If the option is never recorded, you can sue the person who granted you the option, but you would not be able to purchase the property from a new owner (unless you could prove the new owner had actual knowledge of the option).

All things having to do with real estate have to be recorded as a matter of public record before unrelated 3rd parties can be legally bound by the obligation. Anything not publicly recorded can only be enforced with the original parties to the contract (or their assigns, heirs, etc....)