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Guest Joe Lee

Lease Purchas/Option Due-on-Sale Difference?

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Guest Joe Lee

I'm going around various real estate forums to find out if there is a difference between Lease Options and Lease Purchase in the respect that after going to a RE legal site LegalWiz.com I came across info on how a Lease with an Option to purchase can trigger the Due-on-Sale(DoS) clause. Since a Lease with an "Option" can trigger the DoS, is a Lease Purchase a way around it? Since a Lease Purchase says you ARE going to buy, instead of a lease Option that states the person leasing this house MAY buy.

 

I bring this up cause I plan to make payments directly to the bank(esspecially if the seller has little or no equity), and when the bank gets a payment from someone else that's name is not on the mortgage, it will raise an eyebrow and questions at some point be asked. I want to make sure my sellers credit will not be at risk cause the bank wants to get a wild hair and try to exersize that clause. I'm sure I will come across sellers that have good credit, little/no equity and want to sell or get debt relief. Thanx

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Hi, Joe. Technically, you are right when you state there is a difference between a lease option and a lease purchase. Notice I emphasize technically.

The reason I do so is because in the real world there isn't. I mean, if someone wants to say that a lease purchase agreement obligates a tenant/buyer to purchase the property, that's fine and well. But, someone needs to explain to me what happens when that tenant/buyer elects not to purchase the house. Let's say they simply change their mind. Or a great but unexpected job opportunity arises and they'll be moving across country. Or they were unable to qualify for any financing. What happens then? Sure, a homeowner can sue, but then what? They win an uncollectable judgement, and they are out the additional legal fees and court costs. Nobody wins.

So, personally, I use lease option, lease purchase, and rent to own interchangeably. I am not an attorney, so if there are any out there who want to take me to task for my opinion, I'd welcome it.

My experience has been that making payments direct to a bank will probably not trigger the DOS clause. Truth is, with thousands of payments arriving daily, the clerks handling all this paperwork are simply processing it all, matching a payment to an account number. Is is possible it might happen? Of course, and the people involved in the deal need to be aware of this possibility and be prepared for it should the unlikely occur.

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Guest Guest

What happens if they don't buy the house when they are obligated to? They loose their deposit, and the seller has no other legal recourse but to keep the purchase deposit. They seller(s) can try to sue, but the agreement says (or the one I have) the seller gets to keep the deposit and that is that. So even if they try to goto court, I'd explain the agreement as it's stated in the contract, and it'll say that they get to keep the deposit, and they are entitled to nothing else. Their isnt anything in that agreement that says they can sue me for 'Specific performance', but I'll have a clause in the agreement saying that I have right to sue the seller(s) for 'Specific Performance' if they dont live up to thier end of the deal.

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Guest Joe Lee

The post on top of this one is mine...... forgot to put something in "Enter your name" box

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What happens if they don't buy the house when they are obligated to? They loose their deposit, and the seller has no other legal recourse but to keep the purchase deposit. They seller(s) can try to sue, but the agreement says (or the one I have) the seller gets to keep the deposit and that is that. So even if they try to goto court, I'd explain the agreement as it's stated in the contract, and it'll say that they get to keep the deposit, and they are entitled to nothing else. Their isnt anything in that agreement that says they can sue me for 'Specific performance', but I'll have a clause in the agreement saying that I have right to sue the seller(s) for 'Specific Performance' if they dont live up to thier end of the deal.

Exactly, Joe.

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Guest Joe Lee

So to be perfectly clear on this, all a lease purchase is, is just a lease option with the added language saying the seller can sue for specific performance is buyer fails to buy? Is there anything else that makes them different, or is that it?

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I'm not sure this is what you are asking, Joe. But, to be perfectly clear, a seller can try and sue you for any reason they like. How successful they are is wholly dependent upon the language in the agreement betweeen the parties involved, the State and local laws that govern such matters, and the competence of the legal counsel representing those parties.

Is that what you were asking?

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Well, I was wondering what the difference was between a lease option and a lease purchase as in what the lease purchase has in the agreement that a lease option doesn't. As in how a L/O makes it an 'choice to buy if the buyer wants to' and a L/P makes it a 'have to buy no matter what'. in the above I was just wondering, does the fact that a seller can sue you make it the only difference between the 2 agreements? or is there more?

 

Thanx for those speedy replies :o I really appreciate it

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OK, I understand you now, Joe. Let me try and help you to understand me.......

As I have noted previously in your thread here, I don't consider there to be any difference between a lease option and a lease purchase agreement. Believing this, I do not have different contracts whereby one is a Lease with Option and another is a Lease Purchase Agreement.

The agreement between myself and the homeowner is my Residential Lease with Option to Purchase Agreement. This specific agreement states that I have the option to purchase the property at any time during the lease agreement. Simple. That is, the right but not the obligation to purchase the property. This is clearly understood and differentiated.

I can't say what another investor's agreements might say. I don't see any advantage to using a contract that would obligate you to purchase the property. Because to do that opens you up to a lawsuit should you not purchase it for any reason. In my way of thinking, an option is much more favorable than an obligation.

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Then in that case of using a lease with option, how do you get around the Due on sale clause(DoS)? Cause I know I'm gonna come across sellers that have good credit, current on payments, and have little/no equity but need to sell for various reasons and I want to open the market to include helping these people out. I know I'm gonna tell them the truth on how a L/O can trigger the DoS IF the bank finds out that the house is leased with an option to buy, I will tell the sellers that there is a chance (be it a very small one) that the bank will call the loan due. I'd hate for them to risk their good credit on a "It probably won't happen, but it could" mentality.

 

Also I'd hate to have to tell the tenent/buyer that the bank has to call the loan due, cause they found out about the option and got a wild hair for wanting the house instead of the payments. And in turn I cant deliver the house, and I got to give their option money back (or goto court, which of course, there is no win-win situation).

 

You see, I thought that L/O's were safe from this cause the person who I got my courses from (Ron Legrand) was telling me up and down on the CD's that the L/O can't trigger the DoS cause the title hasn't transferred. I was like, "Man That's Great!!" But then I found out later on, through a legal website, that in fact a house with an option to purchase can trigger the DoS ^_^ .....HeartBreak to say the least.

 

I wonder what other fun tidbits I'm going to find out before I have the true updated facts before I go out and make me some money. Hope you see where I'm comming from. Thanx for bearing with me

 

-Joe

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Joe, I understand your concerns about the DOS. I really do. However, in my opinion, you are sweating needlessly.

For starters, in maybe 150 lease purchase deals over all the years I have been involved in this business, I have not had one lender call a loan in because they discovered an option on the property. Does this mean it will never happen? Of course not.

But the likelihood of it happening is remote. Certainly not enough of a concern to have you put your investing career on hold before it even begins!

Yes, there are risks in everything we do. You need to be aware of them, have a Plan B in case the risk becomes reality, and then proceed with your plan. Don't let fear prevent you from pursuing your dream. Don't let the paralysis of analysis that is so common among newbies stand in your way of success! I cannot overstate this!!

Think about it.........what is the likelihood of a lender discovering a property has an option on it? How would they discover it? And if they do and see that for the past two years the payments have been made on time, what benefit would they obtain by calling in the loan?

It is a legal grey area that an option can trigger the DOS. Much depends upon the contracts themselves, what is written in and what is not written in. And much depends upon the underlying loan and contract involving that, too.

Again, my opinion is you are putting obstacles in front of you that should not be an overriding concern at this point in your career.

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Wow, 150 deals and not one lender call the loan due? That's very comforting to hear. But I was only concerned about it cause I heard on CREonline.com that lenders were calling due loans on houses that had options on them cause the District Attorney said there were option scams going on. In my opinion the homeowners should be concerned, not the lender. It's the responsibility of the homeowner to do their due diligence on their tenent. But anyhoo I appreciate the concern, I just like knowing the details about the business. I'm gonna get started regardless of anything I come across, while I'm getting to that point, I might as well learn all I can about the biz. here's the link to the post describing that option scam http://www.creonline.com/wwwboard/messages/44469.html One more thing, in your course, do you talk about the DoS? and Do you tell the homeowner the fact about the DoS, or is it such little concern that you don't tell the seller this??

 

Oh yea, wanted to tell ya, your site looks beautiful, love the layout! And it's looks like it's just getting up and running, can't wait to see what will unfold here!!

 

-Joe

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Joe, I've got to quickly run, but let me get in a few more words on all of this.

I saw the thread you linked. I think the key word in all this is scam. What we do, as legitimate and honest business people and investors is not a scam. Run your business as a provider of a service, as a solution to a problem and, for the most part, you'll be rewarded financially and your reputation in the community will be a rich one, as well.

On the other hand, if you are misleading the people you are claiming to be helping, you deserve the fates that fall upon you. Joe, you sound like an honest individual. Get to work, do your deals in a fair and honest manner, and you'll do well in this business. I'm here to help you in any way I can, as are the other folks on this board.

Also, no, I do not get into the DOS in my book exactly for the reason you describe: it has never been an issue for me. And, no, I do not hit the homeowner over the head with horror stories about what might happen. Truth is, it never comes up in conversation with them. If it does come up, I would be completely honest with them, and answer all of their concerns based on my experiences. If they elect not to do the deal, that's fine. I only want their business if they're comfortable. There are other deals out there. Tricking and misleading homeowners and tenant/buyers is exactly how legal actions arise and problems begin.

I receive enough aggravation from my in laws that I don't need them in my business, too ^_^ .

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One more thing and I'll drop this subject ^_^ I don't mean to try anyone's patience, but I gotta ask this last thing.

 

What would your plan "B" be? If the lender does want the house more than the money, and I have a tenent/buyer in the house already, what should I do? I'm not sure if the T/B will be able to qualify for a re-finance or not, lets assume for now that they can't. What should I do if they cant? And if I didnt disclose to the seller about the DoS cause they didnt ask, and they want to sue cause they are losing the house to foreclosure, then what? Man I *HATE* to sound like a doom-sayer, but if I don't tell the homeowner about the DoS and they take me to court, a judge could see it as me neglecting information to the seller and rule on those grounds. Man this is gettin heavy. Again, I just want to go the best course in this, thanx for your input.

 

Again, I'm sorry but I need to ask this, Thanks

 

-Joe

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Joe, no need to apologize. That's what this board is all about. Asking, answering, learning, and doing. I'm sure this thread has been helpful to others, too.

First, I must start by saying I am not an attorney, and in this matter I am offering my opinions based on my experiences as an investor, not as legal counsel.

Now, let's assume that the unusual occurs, and the lender takes a hard line and invokes the DOS. Let's further assume that the tenant/buyers are unable to qualify at this time, too. Where does that leave you?

Well, can you qualify for financing? Obviously, one of the first things you would do is to see if that is possible. If so, you do and cash out the homeowner and your problem is solved.

But, let's take a further doomsday approach and assume you can't get financing, either.

Now it's all on the homeowner to go and refi their property. They won't like it, but it is in their best interest to do so because they have most to lose, don't they?

Now, as for the homeowner coming after you because their lender took this action, in the real world I think they would have a tough argument to make. Again, it comes down in large part to what is and is not written in your agreement with them.

For example, most every contract states something to the effect that the seller acknowledges they understand what they are signing, they agree with it, and that they have been advised to seek legal counsel prior to signing.

I'm comfortable in these deals and with my contracts that I am not the responsible party should the DOS be invoked.

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