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Russ Whitney use of lease options I received an email that says Russ Whitney is using lease options. I do not know the sender or whether what he says is true. If you have any information on this, please contact me www.johntreed.com. Overpriced new homes According to the email, Whitney lease-options brand new new homes. The writer says the homes are nice, but about $10,000 to $20,000 overpriced. Can only exercise on one day He further states that the lease option is for one year, that no part of any rent payment is credited toward the purchase price, and the lessee-optionee (tenant) can only exercise the option on one day"”the anniversary of the beginning of the option. Typically, you can exercise an option on any day before its expiration. Confining the exercise of the option to one day sounds like a tactic to discourage exercise. If an option is not exercised, the lessor-optionor (landlord) typically can keep all the extra money the lessee-optionee paid and the lessee-optionee gets nothing for that extra money. I wrote a book called Single-Family Lease Options. It generally condemned them as unethical and possibly illegal the way they are typically used. I also wrote an article about them elsewhere at this Web site. Young couples Here' the big picture problem with them. They are typically offered to a young couple who want to own a home

but who do not currently qualify for the necessary mortgage. Why not? They have bad credit or inadequate income and/or down payment money. The young couple is told that the lease option is a way for them to buy a home. In most cases, they are charged a lump sum that is comparable to a down payment up front. The amount may be less than the down payment would normally be, but far more than the typical apartment or rental house security deposit. No rent credit The young couple also agrees to pay significantly more"”$200 to $300 per month"”than fair market rental to live in the property. In most cases, at least part of the rent is credited toward the purchase price. Although my writer tells me Whitney gives no such credit. The amount of the credit should be equal to the amount by which the monthly payment exceeds fair market rent. Option price too high The final issue is the option price. An option or a lease option says the lessee-optionee can buy the house for a certain price during a certain time period. In most cases, the time period is one to three years. Whitney' time period is reportedly one year. How high the price is set is extremely important. The fair option price would be current fair market value of the house at the beginning of the lease option. That way, the lessee-optionee benefits from any appreciation that occurs during their lease period"”as they would if they had bought the property. But lessor-optionors typically set the option price about 10% above (for each year of the option) the current fair market value, because they want the benefit of any appreciation. Whether they actually buy the house Whether the lessee-optionee actually exercise the option and buys the house depends on two things: "¢ whether they can qualify for a mortgage before the expiration date "¢ whether the option is "in the money" Still can"t qualify Generally, they cannot qualify for a mortgage before the expiration date for the same reasons they could not before: bad credit and not enough income/cash. What reason was there to believe their credit or income-cash would improve? Probably none. It is arguably unethical and maybe illegal to put people into a situation where you know they are not likely to succeed"”especially when you are charging them a lot of money to do so. Not worth it because price too high The phrase "in the money" means the option has equity. That occurs when the option price is less than current fair market value of the house. Actually, it has to be significantly less to cover the transaction costs. In the vast majority of lease-options, the lease option is not in the money when the expiration date arrives. Why not? Because the option price was set well above fair market value at the outset precisely to prevent it from ever being in the money. Scam When done in the above way, a lease option is a scam. The owner of the house is telling the tenant, "If you give me lots of extra money up front and monthly, you will become a homeowner." When, in fact, the seller knows the tenant will probably not be able to exercise the option because they will still have the same credit or cash problems at the end of the option. Furthermore, the seller also knows that he has set the option price so high that the tenant will not want to exercise the option even if they could because the option price will be higher than the fair market value of the house on the option expiration date. To state it as succinctly as possible, the tenant is told paying the extra money will get them their own home when, in fact, that extra money will just line the seller' pocket and the tenant will be far worse off financially when it' over. Nastier Whitney' approach, if accurately described above, sounds nastier than normal. Not crediting any rent towards the purchase price and letting the tenant only exercise on one day are far worse than even the lousy terms usually seen in lease options. Is Whitney doing that? I don"t know. I need more information. Please help me if you can. There are many, many more legal and ethical implications of the usual lease-option scam. See my book for details. "Backed by an investor' credit rating" The email also said that Whitney has these homes are built ""¦using construction contracts backed by an investor' credit rating and a couple of thousand down"¦" I am not sure what that means, but it sounds like Whitney gets profit if things go well, but someone else loses if they don"t. Copyright 2004 by John T. Reed Last update 5/6/04 John T. Reed, a.k.a. John Reed, Jack Reed, 342 Bryan Drive, Alamo, CA 94507, Voice: 925-820-7262, Fax: 925-820-1259, www.johntreed.com

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