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Pitfalls of lease options |
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Category: Buy & Hold Total Views: 737 Member Comments: 4 |
Posted on: 10/20/2008 Posted by: thefullpriceofferguys Blog Points: 26 View all blogs >> |
PITFALLS OF LEASE OPTIONS
SELLER-SIDE:
1. A Lease Option violates the Lenders Due-On-Sale Clause.
(The Lender CAN call the Loan Due in full within 60 days.)
2. The Tenant has a claim of Equitable Interest in the Property.
3. The Tenants Judgment Creditors CAN attach a lien on the Seller's Property.
4. Only 14% of all Optionees ever exercise their Option (purchase the house).
5. Damages.
6. The Seller can't evict a non-paying Tenant/Buyer, they must FORECLOSE.
7. Negative Cash Flow.
8. More Risk and Liability.
9. No Asset Protection.
10. Since 1917 the IRS ruled that there is NO SUCH THING as a Lease Option. (It is a DISGUISED "SALE", period.)
11. The Property can be reassessed for tax purposes.
12. Loss of 1031 Exchange Privileges.
BUYER-SIDE
1. The owner POCKETS RENT and does not make payment – FORECLOSURE.
2. The owner GETS DIVORCED, house must be SOLD as part of settlement.
3. The owner files for BANKRUPTCY and MUST SELL all assets.
4. The owner GETS SUED and a judgment is placed on home or is FORCED TO SELL.
5. The DOS may be called in.
6. If a DEATH takes place, property could get tied up in PROBATE.
7. The buyer may make improvements to home only to lose them for any of the above reasons.
8. The buyer may never be able to use the rent credits in an Rent to own type of Lease Option.
9. The buyer may never get to the point of being financed (only 14% do).
10. The buyer will, more than likely, LOSE THE OPTION MONEY.
11. The buyer can not get the TAX ADVANTAGES.
12. The buyer can not share in any FUTURE APRECIATION of the property.
SELLER-SIDE:
1. A Lease Option violates the Lenders Due-On-Sale Clause.
(The Lender CAN call the Loan Due in full within 60 days.)
2. The Tenant has a claim of Equitable Interest in the Property.
3. The Tenants Judgment Creditors CAN attach a lien on the Seller's Property.
4. Only 14% of all Optionees ever exercise their Option (purchase the house).
5. Damages.
6. The Seller can't evict a non-paying Tenant/Buyer, they must FORECLOSE.
7. Negative Cash Flow.
8. More Risk and Liability.
9. No Asset Protection.
10. Since 1917 the IRS ruled that there is NO SUCH THING as a Lease Option. (It is a DISGUISED "SALE", period.)
11. The Property can be reassessed for tax purposes.
12. Loss of 1031 Exchange Privileges.
BUYER-SIDE
1. The owner POCKETS RENT and does not make payment – FORECLOSURE.
2. The owner GETS DIVORCED, house must be SOLD as part of settlement.
3. The owner files for BANKRUPTCY and MUST SELL all assets.
4. The owner GETS SUED and a judgment is placed on home or is FORCED TO SELL.
5. The DOS may be called in.
6. If a DEATH takes place, property could get tied up in PROBATE.
7. The buyer may make improvements to home only to lose them for any of the above reasons.
8. The buyer may never be able to use the rent credits in an Rent to own type of Lease Option.
9. The buyer may never get to the point of being financed (only 14% do).
10. The buyer will, more than likely, LOSE THE OPTION MONEY.
11. The buyer can not get the TAX ADVANTAGES.
12. The buyer can not share in any FUTURE APRECIATION of the property.
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Category: Buy & Hold
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I agree with RealEstateInvestor that there is a way to do lease options safely but just be aware of these potential risks and pitfalls. The best anyone can do is to get a competent attorney to review your contracts and mitigate those risks.
BTW, I've accepted the debate and I will be going over how to simulate lease options using title holding land trusts.
I would love to debate you on each and every point you try and make here. None of them are valid. If You do a lease option contract correctly you avoid every issue you try and make above.
Im glad only 26 people have wasted their time reading this negative crap.
Sean
One way to fix all this is to have a 12 Month Rental Agreement and an Option to Purchase Agreement. We keep the 2 seperate and the Option to Purchase spells out that they have no equity position in the property. I had to do an eviction and had no problem.