Lease option and the option deposit?

[zachj]

If I have a property under lease option is there any issues with my tenant/buyer making out the option deposit check to me the investor instead of the original owner... because when my tenant/buyer goes to purchase from the owner (assuming I can't sell directly seeing im not on title) the lender will want proof of the the down payment deposit.   
When the check shows my name instead of the owner will this not cause an issue?

[AJ290]

No issues at all with the option money being paid to you.  When/if your tenant/buyer chooses to exercise their option, there will be a paper trail showing the details of your deals with both the homeowner and the t/b.

[Dave T]

Why are you making the option consideration a "down payment"?  Won't you run into equitable interest issues if your tenant buyer backs out and wants his "down payment" refunded.  Why not simply use the option consideration to reduce the contract price of the property when the option is exercised. 

Say you have set option price at $100K and buyer has given you $3K option consideration.  When the buyer exercises his option, you write up the sale contract for a purchase price of $97K.  There is no "down payment' already in hand this way.

I don't do lease options.  Just playing devil's advocate.

[71tr]

I agree with DaveT, don't confuse option consideration with down payment.  Your TB gives you an option payment in return for the option to buy the property at some point in the future at a predetermined price.  If they don't exercise that option you keep the consideration and they just continue to rent.

[zachj]

Well what I was thinking is that with the TB having 3% into the deal when they go to purchase it will be that much easier for them to get financing because they will have a down payment into the deal.  I guess that will be a detail I will have to let the TB worry about.  The option consideration is definately a cleaner way to go.

[Dave T]

Your strategy is great IF everything works out as you intended.  What if your tenant/buyer does not get approved for financing and the financing contingency allows him to cancel his offer and get a full refund of his deposit. 

Now, you have to give the $3K back because you called it "downpayment" or agreed to apply it to "downpayment" which gives the buyer equitable interest.  If it goes to court, judge will tell you to refund the seller's downpayment.  Won't matter that you called it "option consideration", you treated it as a downpayment.  If it walks like a duck.....

[zachj]

Wait I thought that's what you suggested that I do, call it a option consideration and just reduce the price of the purchase?

[Dave T]

Well what I was thinking is that with the TB having 3% into the deal when they go to purchase it will be that much easier for them to get financing because they will have a down payment into the deal. 

After your comment, I felt I needed to add ammunition to my argument

[defcon]

down payments aren't refundable.  when a buyer qualifies for conventional financing with 20% down, do you think the bank will refund their 20% down payment they've initially put in when the homeowner defaults on the mortgage.  the answer is NO.  kiss that 20% down payment goodbye because the bank will be happy to foreclose on the property.   the only time the bank will liquidate that money is when you refinance or when you sell it.

in regards to option fees, consideration fees, down payments being applied to a predetermined purchase price, you're giving equitable interest of real property to your tenant/buyer. 

if you want to avoid equitable interest then nothing should be applied to a purchase price.

giving monthly rent credits applied to a predetermined purchase price also gives equitable interests to a tenant/buyer.

[Dave T]

down payments aren't refundable.  when a buyer qualifies for conventional financing with 20% down, do you think the bank will refund their 20% down payment they've initially put in when the homeowner defaults on the mortgage.  the answer is NO.  kiss that 20% down payment goodbye because the bank will be happy to foreclose on the property.   the only time the bank will liquidate that money is when you refinance or when you sell it

zachj is using the term "downpayment" in the context of an earnest money deposit that is applied to the seller's cash due at closing at the settlement table.  By calling the option consideration a "downpayment", he may be creating equitable interest for his tenant/buyer.

When the buyer's financing goes sour and the buyer wants to unwind the deal, courts have repeatedly determined that "equity" demands the seller refund all money held on deposit

[herbster]

OK guys give me a little leeway here I'm just learning to.
Option Consideration should never be called downpayment.
Downpayments are for sales i.e. Land Contract. Opt. considerations are for lease options.
Equitable interest shouldn't come into play unless there is a problem with the t/b and seller.
equitable interest is figured by more than the consideration and rent credits, example how much appreciation the property has, how many improvements has t/b made, how long have the t/b been there and more, a Judge would look at all.
Opt. cons. is normally around 2-5% and Land contracts 5-20%.
AJ290 help me here pard. herbster

[NCREI]

Never call an option payment a down-payment on any contracts or imply it is a down-payment with the tenant-buyer.  If the tenant-buyer exercises their option, work with their mortgage broker to show this option payment is money received towards the purchase of the property.  If the bank accepts it as such, then consider it a down-payment.

[AJ290]

. . .giving monthly rent credits applied to a predetermined purchase price also gives equitable interests to a tenant/buyer.

No, it doesn't.

[BLL]

. . .giving monthly rent credits applied to a predetermined purchase price also gives equitable interests to a tenant/buyer.

No, it doesn't.

It depends on the size of the credit and the mood of the judge. If it looks like a sale, it will be treated like a sale. The substance of the agreement is more important than the form.

[Roger J]

First, there is an option FEE - Not a deposits (implies refundable) and not a downpayment (implies earnest money/equitable interest).

It is always an upfront, NON-refundable option fee.  This fee is covering the seller's time that the property is taken "off the market" giving the buyer the OPTION to purchase the property at any time within the option period.

Frankly, it's better to NOT have the option fee applied to the purchase price at all.  However, since most of us want the maximum option fee that we can get, the only way to do that is to offer a "discount" on the purchase price.  Always check state laws concerning, but generally speaking the best way to include that in your option is something to the effect of: Option fee is NON-refundable.  The amount of the option fee will be discounted from the purchase ONLY if buyer exercises their option to purchase within the time frame of the contract.

Second, saying that giving rent credits DOES create equitable interest or DOESN'T isn't worth arguing about UNTIL you determine HOW the rent credits are being given.

A rent 'credit' in the form of interest (ie determing your rent payment by applying an interest rate to the balance) is almost sure to get an equitable interest verdict should it go to court.  Again, state laws and the drafting of the contract is still the most important.

A rent 'credit' in the form of additional rent (ie rent is $650, but $750 if you want a $100 rent credit) is a strong candidate for equitable interest.

A rent 'credit' that is actually a bonus for timely payments and given ONLY if the option is exercised is much harder to nail down to equitable interest.  Example:  Rent is $750/monthly.  A $100 rent "credit" will apply as a discount to the purchase price for each payment so long as the payment is ON TIME and the buyer exercises the option to purchase.

Raj