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Protect interest with a lease option or purchase

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I am trying to figure how to protect an interest with l-t-o. a good point was brought up about would if a seller, sells to someone else, refinance the property, simply gets lost or file bankruptcy. how would one go about protecting an interest. this conversation came taking a property subject to is better than a lease option and i want to see if others can help to a conclusion.

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No doubt that taking title via a Subject To, or any way for that matter, puts you in a stronger position. That's pretty obvious.

But protecting your interest when doing a lease option isn't impossible, either. For starters, a Memorandum of Option will cloud the title so the homeowner cannot just up and sell the property out from under you. A Performance Mortgage will go even further in protecting your interest in the deal, and will give you the right to foreclose on a homeowner who doesn't perform as per the lease option agreement between you two.

A homeowner can't just file bankruptcy and toss their house into the mix, either. If they are attempting to include their property, then it needs to be in default. And this is why you shouldn't be paying the homeowner directly each month. This way you know your rent payments are going where they should: to the lender.

Finally, you can place the title in escrow at the beginning of the deal, so should the homeowner vanish and assume a new identity in South America, your attorney can get the wheels turning so you can exercise your option to purchase as planned.

Bottom line is that a Subject To will give you more control, since you are the new owner. But a lease option is, in my opinion, much easier to get a homeowner to agree to, and it also has more wiggle room in case something goes wrong. Like all things, there are pros and cons and you need to weigh both and determine what is the best fit for you at that time.

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Its my understanding that if the seller files bankruptcy the house can be thrown into the mix. (but I am not an attorney) If there is equity the other creditors included in the BK will demand it. Only if there is no equity will the subject property be retained. This is of course in a Chapter 7. A Chapter 13 should not impact your position as long as everything is current.

 

You can protect your interest many ways. One idea is us a mortgage or deed of trust and actually become a creditor so there truly is no equity.

 

I also agree with Michael. You would rather make your payments directly to the lender. Or make the check payable to the lender and send it to the seller to forward on. Worst case, get access through a phone system or internet so you can be sure the seller makes the payments (this is a hassle though) If I don’t send payments to the bank myself I have the seller sign a form that states under any default I can make payments to the bank directly and that I will be credited $3 off my price for every $1 I send to the bank to make up back payments.

 

Hope this helps.

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Get to know your state/provincial laws well. Here in Ontario I choose to use an agreement for sale (aka contract for deed) because:

 

1. The seller can't refinance without your permission.

2. The seller can't sell out from under you.

3. It exempts the value of the contract (usually the entire value of the property) from bankruptcy proceedings.

 

And at the same time it also saves you from a few sub2 pitfalls:

 

1. No land transfer tax (VERY expensive here).

2. No legal fees.

3. You can get out without deeding the property back to the seller.

 

Now a CFD might not do all of this for you in your area but it's worth looking into.

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