You are viewing the printer-friendly version of Lease Option TipsLease Option TipsLease options can be fun and profitable, but they can be pitfalls. Here are some legal and tax tips.Protecting your Option Lease/options are good except when the seller decides not to live up to his end of the bargain. You can sue the seller, but this will cost you money. Protect your option. Record the option - have you option signed before a notary. You can then record your option in the public real estate records. This will give the world public notice of your interest. If it wasn't notarized then you can sign an affidavit called a memorandum of option and file it in the records where the property sits. This doesn't create a lien; it does create a cloud on the title. Escrow the deed - If something happened to your seller you could have a problem getting a deed signed. An escrow should be created up front in which a title company or attorney holds an executed deed. When you are ready to exercise, you just tender the money to the escrow agent and collect the deed. Record a Mortgage - A mortgage is recorded to secure payments on a promissory note. A mortgage can be recorded to secure performance of any agreement, even a purchase option. You as a buyer will be a lien holder, in the same position as a secured lender. If the seller refuses to sell, you foreclose. Now the seller has to go to court to protect him rather than you having to go to court to protect yourself. Avoid the Equitable Mortgage Buyers who default on the lease option don’t always go away quietly. Sometimes they fight the eviction and go into court stating they have equitable interest in the property. This means they are trying to argue that the relationship is not landlord tenant but rather seller buyer. If the judge agrees then that would require you to foreclose the tenant and not just evict him. Here are some tips to avoid this. Use Separate Agreements - Give your tenant a lease and a separate form for the option agreement. Keep your term short - Don't give tenants more than one year options at a time. If they insist on three years, give them one year with 2 rights to renew. Draw up a brand new lease and option agreement each time he renews and raise the purchase price each time. Take a security deposit - Make this look like a landlord tenant relationship, take a deposit, even if it's small. Pay the taxes and insurance - Do not let the tenant pay the taxes and insurance, this makes it look like a sale. Don't give large rent credits - The more equity the tenant has, the more likely the judge will favor an equitable mortgage. Watch your language - Don't use words like credit, seller, or buyer in your agreements. Use words like non refundable option, landlord and tenant. aa |