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A friend of mine found this yahoo, check it out guys! What do you guys think?"

 

 

Thinking of Doing Lease-Options?

 

You'd better do it right or you may be sorry!

 

Lease optioning the traditional way, non-refundable option money upfront, applied to the purchase price, then monthly payments, some of which is applied to the purchase price, is like a loaded shotgun which can blow away unsuspecting home owners.

 

How dangerous can a lease-option be? Let me count the ways:

 

IRS Problems

Legal Problems

Financial Problems

Due on Sale Violation

State Usury Laws

The IRS has determined that most lease options are really disguised sales. "When a lease option is a masked land sales contract, the tenant with a purchase option becomes an owner of the property with equitable owership in the property; equitable because he is in possession of the property and makes the payments, which apply in part against the purchase price, but has not yet received the deed." [McClellan v Lewis, (1917) 35 CA64]

 

Whew! This means, among other things, the financial, legal and tax problems of the tenant, the person leasing the house, could affect the title of your home, since he is an owner, according to the IRS.

 

In other words, a judgement against your tenant by John's House of Cars could attach to your property as well! As could IRS liens, lawsuits etc. And if the tenant died, your house could be tied up in the probate of their estate for years!

 

OK, you are sure your prospective lessee has no IRS, legal or financial problems and is in good health.

 

The best laid plans of mice and men have been known to fall short. What if your tenant is laid off or cannot make his payments in a timely fashion? Or, as happens in 40-60% of lease options, the tenant, for whatever reason cannot buy the property as agreed?

 

In both those instances, you want him out! And, the contract clearly spells out that he forfeits his upfront deposit, if he doesn't buy, doesn't it?

 

If he knows his rights or has an attorney that does, you may have a Battle Royale on your hands!

 

The judge says, "sorry, but this man is not a tenant. He is the owner of your property and the only way to get him out is to bring a judicial foreclosure suit against him!"

 

KaChingggg!

 

A judicial foreclosure means attorney fees, time, a year or more in most cases, during which time you will probably not receive a dime in rent. Once you have foreclosed his ownership, you may have to bring an ejectment action to get him out of the property and then file a "Quiet Title" action, to clean the property's title.

 

Did I mention you will have to make all the property's payments during this time?

 

Those are just the highlights! We haven't said anything about potential IRS problems you could incur for taking tax write offs against a property you did not own!

 

Or potential problems with State Usury laws or that the bank could foreclose on your mortgage because you granted someone an option in violation of the Garn St Germain Act.

 

The answer?

 

Put the property into a Trust first. A qualified land trust will accomplish the same financial goals as a lease option but with none of the negative liabilities associated with the lease option.

 

Kmt Partners, Inc are real estate marketing consultants. Among our clients are Trust Administrators. They acquire property across the United States with our assistance.

 

If you would like to know how we can help you use the Trust vehicle to do more and safer deals, please contact us."

 

Brandon or Cruz

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For starters, avoid KMT Partners Inc. They are a scam. I know several dozen people who have submitted loans to them and they have never closed one. I believe they are a disguised lead generation company.

 

Best wishes,

 

Mike

:ph34r:

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That "article" has been around the internet in a variety of forms over the past few years. Of course, you'll note that the author has a solution. That would be his sales pitch to right all the wrongs of lease purchasing using his company. When in doubt always look for the money angle.

As one who has been involved in about 400 lease purchase deals of various kinds, in a dozen states, over an 8 or 9 year period, I am confident when I say that, done correctly, a lease purchase transaction is one of the safest types of real estate investments you can be involved in.

Along the way there has been an eviction or three, as well. They were just that, too. An eviction of a non paying tenant. Nothing more, nothing less.

Due diligence, strong paperwork, some common sense precautions, and you'll find your problems reduced to a minimum.

As for our friends at KMT Partners, Inc., in the spirit of the Holidays I'll be kind and just say that I disagree.

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Thanks guys for the answers!

I was thinking in those lines, but I was just wondering if someone actually had a way to protect oneself from this happening. So, let's say that we use an escrow company and the house payment stays current, but the homeowners still find themselves in trouble financially, let say with others loans and they find themselves having to file bankruptcy, what happens with the house? Is the T/B messed around on this somehow? What exactly happens? This is aprt of the question that I had. It would seem to me that this would be a way for the homeowner to get their house back or defaulting without penalties. What do you guys think?

Brandon or Cruz

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The specifics if the BK and the overall situation of the individual(s) filing all factor into your question. In addition, the laws for BK's differ dramatically from state to state. There are all sorts of different exemption levels, for example. I'm not a BK attorney in Texas, so I won't venture a guess here.

It would seem to me that this would be a way for the homeowner to get their house back or defaulting without penalties.
If you are asking if it's possible for a shrewd homeowner to break their agreement with you by filing a BK, I highly doubt it. If it's part of the BK and the loan isn't current, filing will not prevent foreclosure proceedings. Of course, the loan will be current because you are making the payments. Right??

And if the loans are current and there is no danger of foreclosure, why would any homeowner include it in their BK?

I play an attorney on TV. I am not one in real life. Our Legal Eagle may come along and shed light on this for us. While Mike isn't a BK attorney, I'm certain he knows a heck of a lot more about this than I do.

As always, I just want to say to get out and do your deals. Do them properly, with due diligence and good paperwork. Your problems will be minimal. Nevertheless, be prepared and when they do arise, face them with efficiency and with any professional help you may need.

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Hi Folks,

 

First thing, lets put the B/K issue into proper perspective.

 

So, let's say that we use an escrow company and the house payment stays current, but the homeowners still find themselves in trouble financially, let say with others loans and they find themselves having to file bankruptcy, what happens with the house?

 

From a typical debtor's perspective, B/K is a drastic remedy...to be used only when you're in a heck of a financial bind. :o Why? Because a B/K follows you around like a stalker with Energizer batteries and it's highly unlikely that someone would file for B/K protection as a tactic...only a last resort (unless they're basically a crook).

 

Assuming there was a B/K, what would happen to the house? It depends on a bunch of stuff like whether it would quaify as an exempt residence or whether there has been fraud. It can be a real mess to sort out and that's why they let judges dress in funny black robes--they don't have to wrinkle their suits while they do the tedious work of sorting out which assets get protected from creditors and which don't.

 

As always, I just want to say to get out and do your deals. Do them properly, with due diligence and good paperwork. Your problems will be minimal. Nevertheless, be prepared and when they do arise, face them with efficiency and with any professional help you may need.

 

Michael C hit the nail on the head...do it right in the first place when you structure the deal. That will minimize potential heartaches :( If something does go wrong (or there are "challenges" as the motivational speakers say) you'll be in much better shape to come out of the situation with your rear end, and your check book intact. :P I would just add to his advice to watch between meal treats and brush often with your favorite toothpaste. Regular flossing also pays off in time. :)

 

Mike P. ;)

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