Lease Option

[dschell]

My wife and I have purchased some investment property and would like to rent on a triple net lease w/ an option for tenant to purchase. 

In this case the monthly rent is $585 w/ $150 rent credit to be applied towards $60 K purchase price.  The tenant/buyer would provide $1,800 in non-refundable option money and I would hold a refundable $1,200 security deposit. 

Also, I would like to make a committment that at the end of the lease I will finance the property for the buyer if he wishes to purchase and he cannot get bank financing.  I am willing to committ to the terms of which I will carry the loan on that date. 

I don't want to transfer deed because of the low down payment.  I have also read that I cannot just originate the loan b/c I am not a licensed loan originator per the SAFE act. 

Am I reading too much into this.......any advice would be much appreciated? 

[AJ290]

You can set up this type of deal in any way that the parties involved agree to, as long as you aren't in violation of any state or local laws.
That said, I think you are asking for too little in the form of option money.  Why not waive that $1,200 security deposit and instead ask for a total of $3K option money?  Better for you to do so.
And why commit to any seller financing a year in advance?  You can always do so later on, when the tenant/buyers prove their reliability over the course of the year.
Finally, the deed is never transferred in a lease option transaction. 

[dschell]

Thanks for the response.

I had read somewhere that if you charge over 3 points of the option price that the tenant/buyers could contest an eviction arguing they have an equitable interest in the property forcing me as the landlord to foreclose. I also read that more than 2-3 points of option money can cause the IRS to view the lease option as a disguised sale and I would not be able use long term capital gains treatment if they secure outside financing at the end of the three year term.  But, I figured I cannot claim this as a long term gain anyway if I end up financing the option price. So that is why I was splitting the money between option and security. I figured I could apply the security deposit to unpaid rent (if it is legal to do that) if they aren't able to make payments and I would need to evict. 

I have no idea if what I read that I understood it correctly or I am making much about nothing.  That is why I thought I'd post and see if I could get feedback from those w/ experience and knowledge.
I'm with you on committing to borrow.  They would have to have made payments mostly on time and be current when the three years is up. 

[AJ290]

To my knowledge there is no truth to the statement that option money over three percent gives the tenant/buyer equitable interest in the property, or that the IRS will view the deal as a disguised sale. 
Use strong agreements to protect your position in the deal, treat your t/b fairly and honestly, and the deal will most likely proceed as planned.  Just be sure to do your homework when checking out prospective tenants or tenant/buyers. 

[Bluemoon06]

Thanks for the response.

I had read somewhere that if you charge over 3 points of the option price that the tenant/buyers could contest an eviction arguing they have an equitable interest in the property forcing me as the landlord to foreclose.

This is really local.  In Texas any option for real property that lasts longer than 6 months gives the buyer an ownership interest in the property and then he can’t be evicted and must be foreclose on.  If that option is not exercised then it is possible (has never been done yet) for the court to require you to forfeit all funds paid for that option.  That means that if you get $5,000 down and the guy pays $1,000 month for 2 years the judge could say he has to get out and you have to give him back the $29,000 he paid you.

This makes lease options impractical in the state if Texas. That is why I paraphrase Dan Rostenkowski when I say that like politics all real estate is local.

[AJ290]

In Texas any option for real property that lasts longer than 6 months gives the buyer an ownership interest in the property and then he can’t be evicted and must be foreclose on.

That is simply misinformation that is thrown around as fact.  I know investors and real estate attorneys in TX who practice options and lease options.  After sending two of them your reply they both stated that isn't true.

[Bluemoon06]

In Texas any option for real property that lasts longer than 6 months gives the buyer an ownership interest in the property and then he can’t be evicted and must be foreclose on.

That is simply misinformation that is thrown around as fact.  I know investors and real estate attorneys in TX who practice options and lease options.  After sending two of them your reply they both stated that isn't true.

I am not a lawyer either and I know investors that practice lease options in Texas also.  I have an article that talks about it from my lawyer.  http://www.lonestarlandlaw.com/Lease-Options.html

I don't see any lawyers advertising that they do Lease Options.

We also discussed it here in 2005 when the law changed. 

http://www.reiclub.com/forums/index.php/topic,6737.0.html

[Lansing Real Estate]

Anyone know if this is legal in Michigan?  Or an alternative if it is not legal?

Thanks

[AJ290]

Anyone know if this is legal in Michigan?  Or an alternative if it is not legal?

Thanks

Yes, options and lease options are absolutely legal in Michigan.

[JOHNNY Q]

I have heard of NNN lease( Triple net lease) in commercial properties for anchor tenants in malls, but never on this small of a deal.
If tenant breach contract what is the collateral? Most NNN lease has to be at least 5 to 10 years for a lender to look at financing it, but only in Big commercial deals.

[dschell]

I am new, but am employed by a company that does mostly seller - financing.  Some customers have credit issues not alloing for deed transfer, so contracts are apporved ease-option b/c deed transfer is not good idea for anyone involved. 

I have heard the attorney refer to the lease as triple net and the contract reads buyer pays taxes which are escrowed, insurance which is also escrowed and responsbile for all maintenance.  There is a rent credit and option portion of these contracts.  I guess it is okay on small residential, he's the lawyer.  Am in Kentucky. 

I plan to handle these same as business and have same attorney prepare paperwork. 

I know what you mean about associating triple net w/ commercial though.  I used to negotiate triple net leases for a previous employer and it was commercial purposes.