Lease Option and “Subject To” - The Investor’s 1-2 Punch - Part 4 21
Arrange for the proper property insurance policy. (As an alternative you can
have an escrow company or attorney handle the close.)
5. Begin marketing your “Rent to Own” property.
POWERFUL TECHNIQUE
Purchasing homes "subject to" is a creative, fast and financially rewarding
way to buy homes. It gives you instant ownership, yet you are not legally bound
to loans in your own name.
This method of buying homes, coupled with lease options and an
effective marketing program, can empower you to achieve financial success
with little risk and great rewards. It takes little money to get started buying
homes “subject to” and, remember, when you are able to buy homes with great
terms, you can pass on great terms to your tenant buyer, making it easier and
quicker to sell homes, and with a greater financial reward to you.
DOCUMENTS
1. Purchase Agreement (With “subject to” clause)
2. Deed (The one that is appropriate for you state)
3. “Subject To” Disclosure (Seller acknowledges you are buying “subject to”)
4. Authorization To Release Information (So you can deal with lender)
5. Power of Attorney (So that you can take care of unexpected problems.)
You will find sample forms and others on this CD. We always advise that you get
a legal review of any document before using to be sure it is acceptable in your
area.
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The nature of a lease contract determines the law by which the parties to the
leases are governed. The lease contract may be verbal or in writing. The verbal
lease is just as binding as the written contract, if the term of the lease is not in
excess of the period prescribed by the Statute of Frauds.
The Statute of Frauds requires that certain contracts be in writing,
particularly those relating to real estate. Generally contracts that cannot be
performed within one year must be in writing. In most states a lease for more than
one year must be in writing in order to be enforceable. As a matter of good
practice investors should commit every real estate agreement to writing.
The period of the contract is determined by the date the contract is signed
rather than the date the lease term commences.
The essence of a lease is the payment of rent. A lease may be defined as a
contract for the possession of lands and tenements in return for compensation in
the form of rent or other income.
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LICENSE
Be careful not to enter into an agreement that is a “license” rather than a
lease. For example: You buy property in a distant location. You feel the need to
have someone on site to keep the property secure. You allow Roger to occupy
the property and use any of it’s resources as compensation for his presence on
the property. That’s a license and vests no enforceable rights in Roger.
A license is a personal privilege and not an estate in land.
TERM
A lease is for a specified term – one month, one year, two years, five years,
etc. That’s called a tenancy for years.
On the other hand a month to month, or year to year, rental is an estate that
continues indefinitely until one of the parties elects to terminate it by giving proper
notice.
HOLDING OVER
If a tenant remains in a property after the expiration of the lease term it is
called “holding over”. Unless there is wording to the contrary all the terms and
conditions of the original lease will continue in force.
Where a lease is for one year, from May 1, 2005 to April 30, 2006, it expires
at 12:01a.m. on May 1, 2006. If the tenant holds over and continues to occupy the
premises during all of the day of May 2, 2006, he will be liable for the all rent due
for the entire second year. Remember, without a clause in the lease to the
contrary, all terms of the lease continue in force for a hold over.
A lessee (the person renting the property) cannot hold over for an additional
few days and then claim he is entitled to possession for an additional year. The
holding over must be lawful. That is, with the consent of the lessor (owner of the
property).
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Where a lease is for 5-years and the tenant holds-over after the expiration of
that term with the consent of the lessor, he can’t claim a new term for 5-years.
The lease would be extended only for an additional 1-year, and so on from year to
year until terminated by either party. Remember, this is only possible with the
consent of the lessor.
The lease could be for 1-year, with a clause in the contract stating that if the
tenant holds over lawfully, the lease shall be in force for another month and so on
from month to month. Provisions written into the lease determine the rights of the
parties.
A lease may be automatically continued in force in the absence of written
notice of termination required under the lease with a clause as follows:
From and after the expiration of the term hereby created, this lease
and all its terms, provisions, covenants, confessions, and remedies shall be
deemed to be renewed and in force for another year, and so on from year
to year unless either party shall have given to the other written notice to
terminate said tenancy sixty (60) days prior to the expiration of the
current term.
PARTIES
There are two parties to a lease, the lessor (owner) and the lessee
(tenant)… often called landlord and tenant. The landlord’s interest is called a
“reversion.” Full rights and use of the property “reverts” to the landlord when the
term of the lease expires. The interest of the tenant is usually an “estate for
years”. Without an additional agreement the tenant’s rights concerning the
property terminate when the lease expires.
The names of the parties are inserted into the lease contract for the purpose
of identification. A mistake or omission in setting forth the parties, if it is not
material or does not cast doubt upon the parties intended, will have no effect upon
the validity of the contract.
Generally anyone who is capable of making a contract is capable of making
a lease.
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A lease may be executed by the owner of the property himself or by a
properly authorized agent acting in his behalf. This could be an officer of the legal
entity (Corp., LLC, Trust, etc.) that owns the property.
If the lease must be in writing under the Statute of Frauds, then the agent’s
authority to execute the lease must be in writing. A lease signed by an agent in
his own name alone would be open to attack by either party.
The execution (signing) of a lease by an agent must be carefully made. An
agent may execute a lease as agent, for an undisclosed principal, in which case
the agent is considered as the lessor. It would be signed “Rose Bush, agent.”
The best execution from the standpoint of the agent, is to include the name of the
lessor, such as: Rose Bush, agent, for Investing Group, LLC.
If you are buying and renting a property through a partnership, LLC,
Corporation or other business entity you should have a signed agreement with a
person of authority in the entity appointing that person as the agent with the power
to lease the property. In most cities and counties the law requires that the true
owner of the property be identified in the lease or an associated document.
An agent who is appointed to merely collect rents has no authority to
negotiate a lease for the owner unless that authority has been expressly granted
in writing.
A lease is a legal document that binds all parties to the terms set forth in the
lease. The lease should be drafted carefully. The lease must be fully understood
by the investor and carefully explained to the tenant. If these rules are closely
followed you should encounter no serious legal problems concerning leases.
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A Real Estate Option gives you 'control' of a piece of property without buying
it. With an option you have the exclusive right to either buy that property, or not
buy it. That is your “option” – to buy or not to buy.
A real estate option is an exclusive right. That means that no one else can
legally buy or sell that particular property during the term of your option.
Unless otherwise agreed to, the property owner continues to pay all costs
associated with the property during the option period – taxes, assessments, loan
payments, maintenance, etc.
During the option period you may sell the property, sell the option or
exercise the option and buy the property.
What if you own an option on a property and the owner sells the property to
another during the option period? You would be entitled to any amount of the sale
price exceeding the purchase price indicated in your option agreement.
Example: Your option gives you the right to buy a property for $100,000.
The property owner ignores your option and sells to another for $120,000. You
would be entitled to collect $20,000 from the owner.
If the property was sold for less than the purchase price stated in your
option you would be entitled to collect the difference from the seller. Of course, it
would probably take legal action to enforce your rights under either of these
conditions. It is rare that a property owner would expose himself to such legal
jeopardy.
An option is an agreement between a seller (optionor) and a buyer
(optionee) to hold open, over a specific period of time, an offer to sell property.
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It's a unilateral agreement imposing an obligation only on the seller. He must
sell if the buyer exercises the option. But the buyer is not obligated to buy the
property if he chooses not to.
People use options because they offer advantages to both buyer and seller.
They give the buyer time to arrange a profitable strategy for the property. They
give the seller compensation for taking the property off the market during the
option period.
The option is only valid if optionor (seller) receives consideration (something
of value…usually cash) for granting the option. The consideration must be
separate and independent of the purchase price of the property. A valid option
creates a contractual right, but does not give the buyer any estate in the property.
When you pay for an option to buy, you are not buying property, but rather
the exclusive right to buy (or not buy) that particular parcel of real estate. That
means you also have the exclusive right to sell the property, should you wish to do
so during the option period. It’s perfectly legal to sell something you don’t yet own
if you have the legal right to buy the property. The option gives you that right.
A purchase agreement is a bilateral agreement. The buyer is agreeing to
buy and the seller is agreeing to sell. Both parties are obligated to the other under
the terms of the agreement… and so it is bilateral.
An option is a unilateral agreement. The seller (optionor) is legally bound to
sell under the terms of the option. The optionee has the RIGHT to buy, but not the
OBLIGATION to buy. The optionee can exercise her right to buy at anytime
during the term of the option, but is not legally bound to buy.
What the buyer pays for the option depends on the circumstances, but it will
be small compared with the selling price of the property. If the buyer fails to
exercise the option, he loses the amount he paid (consideration) for it.
Options involve tax consequences for both parties. Two issues are involved:
when is tax imposed and is the gain a capital gain or ordinary income. Tax may
also be incurred if the option is sold or exchanged. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
