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gfranz

Questions About DF etc.

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I’ve been hearing a lot of stuff on the net lately. Anyone have any answers to these questions for me?



1) Option down payment from buyer is not taxable under IRS Rules (?) until the tenant-buyer exercises the option. If he doesn’t exercise the option, is all that money forever tax-free?



2) Rent Credits can be considered installment payments and can trigger Dodd-Frank - are rent credits dead? I've been reading about concessions here on the boards. How do they work?



3) Making the tenant-buyer responsible for repairs can trigger Dodd-Frank - This puts the responsibility back to the seller. No longer an advantage to the seller?



4) Is a “fee to release the option” used in addition to the option down payment?



Thanks to everyone who can help me answer these questions.



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Hi, Gary, and welcome to The Naked Investor.

First, be skeptical about much of the "stuff" on the 'net. It's often erroneous. That said. . .

 

1) It's true that option money needn't be reported as income until the option is exercised. But it's also true that option money is required to be reported as income when the option expires.

2) Don't get too stressed over Dodd-Frank. It is targeted more at seller financing than lease options. Rent credits come into play because a judge with an imagination could rule that they are a form of financing. An easy work around is to have a seller concession in lieu of the rent credits for the same amount. No big deal. With all parties wanting the same result, the property being sold/purchased, and an attorney and/or title company who is cooperative, the deal gets done.

3) Can you link to that part of the law? I'm not familiar with it.

4) Not sure what you are asking here, Gary. Can you clarify, please?

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Here's what I had on Question #3: http://www.deangraziosi.com/real-estate-forums/contracts-and-offers/151725/how-does-dodd-frank-act-affect-investors

 

Special Notes on Lease Options:
1) A lease option between a seller and an investor (non-owner occupant) is not restricted under Dodd/Frank;
2) Technically, since a Lease Option between an owner and a tenant/buyer does not convey title, it is not a sale, which means it does not fall under the regulations of Dodd/Frank; however, if either the IRS or a court determines that it is an installment sale to a consumer borrower, it would be deemed a loan. To avoid such designation, and avoid lawsuits:
a. Use Separate Documents for lease and option, executed on different dates, and with no reference to each other. You can charge option consideration with the option agreement as it is a legal requirement of an option, but do not accept option consideration in installments;
b. Keep Term of lease to tenant buyer under 3 years;
c. Offer No Purchase Credit/Rent Credit on monthly or periodic payments
d. Major repairs and maintenance are the responsibility of the owner—do not assign these to the tenant/buyer;
e. Complete some basic lease option underwriting and pre-qualification
i. Conduct a Credit Check;
ii. Confirm Employment;
iii. Confirm Income;
iv. Recommended: Request information on all Monthly Loan Payments, Other Loan Payments, Other Mortgage Obligations, and Alimony and Child Support Payments;
v. Run a Debt to Income Calculation, including their monthly Lease Payment.
3) Suggested: For any arrangement that could fall within Dodd/Frank legislation, have borrower complete a Uniform Residential Loan Application, such as the FNMA 1003, (Reference:https://www.fanniemae.com/content/guide_form/1003rev.pdf ) or modify such a form for your own usage—then use that information to research borrower’s repayment capability per the instructions above.

 

As for question 4, I remember reading (somewhere) that an investor didn't want the seller to get any of his TB option fee, so someone wrote back to charge a "fee to release the option" and that way the seller couldn't get any of the option fee or consideration. So I just answered #4 myself (use one or the other). Do you have a way of keeping the seller from getting any percentage of the option fee you charge the TB? or am I just being too greedy? ;-)

 

Thanks,

Gary

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Gary, just got off the phone with a friend/colleague of mine who, in my opinion, has forgotten more about lease options than most of us know. He also has a law degree. He confirmed what I have been thinking and saying all along. Dodd-Frank has almost zero effect on what we do here. The above you linked to is a combination of common sense, (good thing), and speculation, (bad thing). No one knows for certain how any new law plays out until there is a legal precedent. Until that happens, until a case goes to court and there is a legal ruling, I see no reason why I shouldn't continue doing business the way I have for almost 20 years. And unless someone can point me to the specific citation within Dodd-Frank that makes rent credits illegal, it'll be business as usual for me. Call me Barney, but I'm a happy dinosaur. :lol:

 

As for keeping all the option money, no, you aren't being greedy. That's our goal in every deal we do. But I don't think you can have a document, such as a Fee to Release the Option, that will make any homeowner agree to giving you all the option money. Some, make that most, are going to want a piece of the pie. Can you blame 'em? I offer them an amount equal to one month's rent as nonrefundable option consideration. Most accept and the deal gets done.

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Gary

I read your post and Michaels reply and think the requirements you mentioned, as far as debt to income and general qualifications to be sure the t/b can afford the property would be met if you have a mortgage broker on board to qualify would be tenants.

This is a good practice to have as you can inform the seller of the t/b ability to purchase his property and how long it could be for them to qualify.

 

Just my opinion of course.

Tom

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