Negative article on Lease/Options

[tgaspard 0]

I think it is important for others to see this negative article concerning lease/options. I realized that most of the negative aspects he points out can be properly addressed with some very good contracts, of which MC provides. I'd agree that a sandwich does have more risk - especially when done with someone with little knowledge and bad contracts. What you guys think?

 

www.investinginland.com/lease_options.htm

[Doug Pretorius (ON) 9]

You always have to take these articles with a large grain of salt when they're being used to promote the author's own material, as is the case with the link you provided.

 

However, much of what is said can and does happen. Being sandwiched between a poor and desperate seller and a poor and desperate buyer, when you yourself are a poor and desperate investor, is not a good place to be, and leaves very few options for all parties involved when things go wrong. As you pointed out, properly written contracts may save the investor (unless maybe the buyer or seller gets pissed off enough to sue you), but the buyer almost always gets screwed, and sometimes the seller loses their house anyway, all the investor did was delay the inevitable.

 

Unfortunately as more people with less knowledge do these types of deals (including sub2 and cfd purchases) there are more and more stories of the house of cards collapsing and the investor ending up in financial ruin. I've never heard of an investor ending up in jail, but there've been an awful lot of threats about that as well. I'm surprised the person who wrote this article didn't bring that up (unless I missed it?)

 

Anyway, we can either do the best we can, or we can forget about it and go back to the old grind. I for one don't ever want to work for someone again!

[Guest Guest_grannyguru]

I think EVERYTHING has risks. I for one am tired of the nitwits who write things like that...despite the fact that of course there is some truth in it. There is some truth in most lies, too. It's anecdotal, but ask yourself: how many of Michael's deals have ended in the kind of misery the author implies is probable and usual?

 

A lease option, despite the negative articles, can provide a positive solution to a negative situation.... win, win, win.

 

The "just sell it" philosophy goes right along with the implied "using a realtor, of course...forget about all this pie-in-the-sky stuff, and let a pro handle it."

 

Unfortunately, the article does not mention what happens to the cash-poor guy when he tries to "just sell it".

 

Especially when you bring in a realtor.

 

It FEELS so much more comfortable to be in with the "nice, normal folks".... But it's an expensive hobby.

 

Realtors even have a name for what they do, after signing up to sell your home for "market price"..... reduce the price, convincing the poor fool of a seller that somehow his home is, as he had feared, not really good enough to sell for market....despite the fact that identical homes did sell for more, you can always find identical homes that sold for less, so the argument looks good. Realtors even have a name for this part of selling YOUR home: they call it the "bump".

 

After not marketing it except perhaps to use it to showcase their other properties and get other listings, they finally tell you it's just not selling....you need to lower the price. Notice they almost never suggest changing the terms....

 

My kid's home could have sold for over 200k; it was sold for under 145, and they had to 'gift' the seller out of that. They still believe that was the actual market value of the home...despite ample evidence to the contrary. Why? Because they didn't do anything "creative" and because they "did the right thing" ....used a realtor to sell their home.

 

When I had to sell my home years ago due to divorce, the six month listing was about to expire, so the realtor brought in a fellow realtor who offered to buy it for 70,000, and told us this was all we could expect for our 3000 sq foot, 6 bedroom home on nearly a half acre in the Bay Area. I told "our" realtor to shut up and sold it to the buyer for $165,000, explaining the choice was that or I'd take it off the market, improve it even more (with my choices for rugs, paint, marble, etc.) and put it back on for 189,000 ...or more ...or she could buy it now and have her own choices. She bought it for 165,000. Cash. Immediately. I made 95000 that afternoon.

 

No thanks, I might add, to the realtor... who knew that the futures of 5 children would be impacted by her trying to get her commission for doing nothing by stealing our home from us.

 

Fact is, the only other thing most folks (and, apparently, realtors) know how to do with a home to sell it is to lower the price, lower the price, and then lower the price some more.

 

I don't know about you, but it's sad to see someone lose their equity like that. And in today's world, with increasing downsizing, etc. it's even sadder.

 

Fact is, Americans ought to be taught how to do things like this in the first place. They aren't, leaving them prey for realtors AND for the "rich folk" mentioned by the author, believing "the poor" have no right to get anywhere.

 

Also: it is NOT TRUE that "rich folks" don't consider selling their homes via lease-purchase. I have one considering it now. Probably he won't do it with me, cause I'm too scared to do it right, but he IS considering it, and the reason is that it may net him a bundle more cash, get the home taken care of for now, etc. He's not doing it with the notion of cheating the possible buyer, either. And he doesn't need the money; he just thinks it would be great to have MORE money anyway. He's weighing the risk against the opportunity for profit.

 

The way the world is going, it would not surprise me to see people like the author or, at least, realtors, embracing 'lease-purchase' and other "creative" methods as if they'd invented them... as the pool of "rich folks" with "good credit" dwindles... much as they have with their versions of "no money down" etc. deals ...which they used to characterize as unethical, illegal, dangerous and just plain bad.

 

Meanwhile, we here on this forum continue to seek things like the lenders who flock here to qualify people realtors won't talk to. People who do not have a clue how to find such lenders. People who won't become homeowners without us.

 

I am being asked to help someone who just wasted a bunch of time with a realtor who kept trying to sell her bank-owned and locally-good ol' boy owned slums which weren't worth anywhere near what they wanted to sell it for.... because she is not rich. She is interested in a lease-option, knowing the truth about it all. Because she has discovered that the "nice and normal", "safe" route wasn't so safe after all. Her comment was something like: "Here I know there is risk something might happen....there it definitely WAS happening.... I was being cheated." She isn't even sure she wants to stay in this area, but a lease-option can give her the opportunity to gain equity while she works on getting a loan and deciding if she wants to exercise the option or not...at least she won't fall behind as prices here rise.

 

Basically while I think it's important to be aware of possible pitfalls etc.. I am tired of the pontifical ...... who get on their steeds and proceed to ride with righteous anger and impale everyone and their dreams, who are finally beginning to do quite nicely, thank you, without them.

 

I let them terrify me into poverty; I am still working to overcome the fear. But I AM overcoming it, and I am going to succeed at this. And I refuse to allow people like that author to stampede me into remaining poor. (And yes, I did the "good ol' boy thing" and got the skills of tomorrow, did it all right, saved their glowing ass.... proved my worth, etc. Then they sent it all to India....)

 

Ask yourself: what is going to happen to these people IF THEY DON'T do lease-options? Or at least sell to the majority who don't qualify for realtors and conventional loans?

 

I am grateful to Michael who was maligned by that article because he does this and even worse, he teaches it! Even though he won't give us his lasagna recipe.

 

Without his help and the help of the others on this forum, it would be a lot harder to get anywhere.

 

Alice

[Doug Pretorius (ON) 9]

Alice, you make lots of good points. But there is one thing I'd like to point out... the author of that article said that lease options are a great tool, and are even used by the rich to get richer. The problem he has is with the poor using sandwich LOs to try to make enough money to pay their bills. And it's a valid point, considering just a few weeks ago we had a thread about just that scenario, where the buyer was getting screwed and wanted to sue, and the seller was digging her heels in.

 

I think anytime you can eliminate one or more of the desperate people in the deal, it's to your benefit. CAs eliminate the cash-poor investor. Conventional purchases with and LO sale, eliminate both the cash-poor investor and the cash-poor seller.

 

BTW, you say you wouldn't be surprised if realtors embraced LOs as if they invented them? I've got 5 realtors advertising in my main newspaper about their "new & unique" home ownership solution -- Lease to Own. If this is happening in sleepy old Canada, it must be all over the place in the US by now!

[vmoney 0]

I think you have to be smart and approach RE investments with both eyes open. When doing lease options you have to consider the risk/reward, and all the possible outcomes (good and bad), and have contingency plans, in the same manner that you should approach any business/investment decision. I think it is true that many people go into this with blinders on and find out too late that things aren't always going to turn up roses.

 

Since I started out in RE I have always estimated my potential profits conservatively while going high on the carrying costs. I try to make sure I always have plans in place, i.e. alternate financing if T/B leaves me holding the bag, etc. You have to work toward the best outcome, but PLAN for the worst.

 

Anyway I have my two cents below with regard to some of the items in the article:

 

What if the seller of the property changes their mind and decides not to sell their $120,000 house for just $100,000, option or no option?

 

I have a clause in my contract that states I DO NOT own the house (if it's a sandwich LO) and I compensate them $500 for the trouble of not being able to sell if the seller does not perform. This possibility is disclosed to the TB up front so they so they go into the deal knowing this.

 

What if the tenant buyer decides not to buy the house and wants their money back?  What if they just stop paying rent as a way of getting their option premium and rental credit returned to them?  Or what if they continue to pay rent but just not the added amount that was to be credited towards the house purchase?  Are they in breach of their lease?

 

I'm not that worried about the TB not performing I just take the house back and keep the non-refundable option payment and then LO to someone else. I have backup $ set aside for any payments I may need to make since I anticipate and PLAN for this up front.

 

I have a good RE lawyer who has does not generally have any issues with evicting TBs if necessary. My contracts state on every page that any option $ is non-refundable and that any breach of contract (lease, option or PA) is grounds for eviction. If I get sued it's really hard for anyone to make a case they didn't know they would loose the option $. That doesn't mean a judge will not take pity on a loser TB and go against contract law, but I find that as with anything you can usually come to an agreement with the TB, i.e. refund 25% of option to avoid court for both parties etc. Again I go into my deals knowing this is a possibility and if it happens I deal with it.

 

What if the tenant buyer has to be evicted for not paying rent?  If they are considered an equitable buyer under state law they can't be evicted and a foreclosure proceeding must be started to terminate their ownership rights in the property.

 

As I said above not really a huge concern for me. My RE lawyer has successfully evicted TB without any issue, for the most part. If your contracts are written correctly this should not be a big issue. Plan for the worst and you won't get burned.

 

What if the property involved is damaged by a fire or some other natural disaster?  Who pays for the repairs?  The owner?  The investor?  The tenant buyer?  Each usually points at the other and says "You fix it."  Unfortunately all are usually broke.

 

In my state maintenance responsibility can be transferred to the TB if the lease is over 12 monts...make sure it is. My contract are very specific on who is responsible for maintenance, damages, etc, so there is no room for interpretation. Also, I try to get the seller to list me on the Insurance as an additional insured. They don't always go for this, but it can't hurt to ask.

 

What if the original owner changes their mind and decides to sell the property today and not to the tenant buyer?  Who is going to bring litigation to stop the sale?

 

See above...have contingency plans!

 

What if the original owner files for bankruptcy or loses a lawsuit and a lien is attached to the property?  How can the investor now convey a property encumbered by liens they can't remove?

 

See above...disclose this possibility to TB and if it happens move on.

 

What if the original owner dies, is declared incompetent, slips into a coma, disappears, or otherwise cannot complete the property sale?  How can the investor convey property they do not own to the tenant buyer?

 

See above...disclose this possibility to TB and if it happens move on.

 

What if the original owner does not pay the mortgage and spends the investor's monthly payments instead?  How does the investor satisfy the demands and needs of their tenant buyer when the property they live in is headed towards a foreclosure sale?

 

My policy is to pay the note directly that way there are no issues.

 

Lease Options Trigger Mortgage Due-on-Sale Clauses

 

As long as the lease is under 3 years there should be no problem. Also, this is a long shot. My lawyer has been doing this for 20 years and has never has a loan called. If the bank is getting paid they're happy. Worst case scenario get financing and pay the jerks off. You did think about that didn't you???????

 

What if the moon crashes into the earth, what if the sky falls in, what if the space shuttle lands on the front lawn, what if Michaels mother-in-law moves in????

 

This guy is selling something and is painting the worst case scenario.

 

My point is not that things can't go awry, but if you are smart, do your best to cover your bases and plan ahead you can mitigate most problems and move on without a lot of pain, and most importantly without a significant financial set back.

 

Just my thoughts...

[MichaelC 160]

Just as I began to read that article, I thought I might take a look to see who authored it. Lo and behold, it's good ol' Robert Abalos. He is a reknowned crackpot, (and I'm being kind), who has been banned from at least two real estate boards I'm aware of. Wouldn't surprise me if there were others, also.

That said, I am aware of his views and have no need to read his "article". If you ever had the chance to read any of his off-the-wall posts on other sites before he was banned, you'd realize he has an axe to grind and products to sell. That's all fine, by the way, as long as the author offers full disclosure and any conflict of interest. He doesn't, of course.

He's entitled to his opinion. Read it and form your own. I've heard it all before. And in the interest of brevity I'll simply say that I disagree because my hands on, real world experience has been quite different from that which the author describes, and quite good overall.