How to not Lose on Lease Option!
When you are buying a house on a lease option, you must protect
yourself from paying your rent payment to the seller, but him not
paying the lender.
The single best way to protect yourself is for you to pay your payment
directly to the LENDER so that you are certain that the payments are
kept current. Many sellers will be okay with this, although many
sellers won't.
Pay the lender directly
Whenever possible, this is how I handle my own lease option
properties. Currently for about 30% of my houses I pay the lender
directly.
In many cases, I started off paying the seller directly, but after a
little bit of time had passed, and I built up trust in the
relationship, I ask the sellers if I can just send the payment to the
lender directly.
Note: One very powerful way I build trust in the relationship is that
I pay my sellers EARLY! I mail checks out on the 25th of each month.
You would be amazed at how this small gesture impacts your
relationship with the seller.
Option two is for you to set up an escrow account you pay your monthly
payments into, and for this escrow company to pay the lender each
month (and notifying the seller and you that they have done so.)
I don't use this method because it's too complicated for my thinking.
Variations on this theme are to send the seller a check made payable
to the lender in the amount of the mortgage payment with a
pre-addressed and stamped envelope to let the seller quickly forward
the check on to the lender.
This allows the seller to feel confident that the payments are coming
in, and lets you know that the payment has been made (by checking to
see if the check has cleared.) Instead, if I can't pay the lender
directly, I simply pay the seller and let them pay the lender. How do
I know the payments are being made?
I get the seller to sign two specific documents up front (in addition
to the performance mortgage or deed of trust and all the other closing
paperwork we escrow on the front end of any lease option deal.)
Document one: Authorization to Release Information
This gives me the ability to talk with the lender about any of their
loans. I can even check every few months that the payments are current
by calling into the lender's touch tone phone hotline and entering in
the seller's loan number and social security number!
Document two: Authorization for Direct Payments
This gives me the right to pay any third party that is owed money by
the seller that the seller hasn't paid who could place a lien on the
property, and to count this money as money paid by me to the seller
under my lease option agreement. This includes mortgage payments,
property tax payments, etc.
Here's part of the agreement we use when buying on a lease option. See
if you can find the powerful incentive we give the seller to make sure
he does in fact make his payments with the money we send him:
"If the mortgage payments, property taxes, association fees, insurance
premiums, or other property payments on __________________________
ever go into arrears, then ________________________________ (Landlord)
hereby gives_______________________________ (Tenant) or his/her/its
assigns or heirs the right to make payments directly to the lender or
other party who is owed payment on Landlord's behalf.
These payments sent directly to the lender or these other parties by
the Tenant shall be considered as rent (or other money due) received
by Landlord from Tenant for compliance of Residential Lease Purchase
Agreement between these parties dated _________________.
To adequately compensate the Tenant for the additional risk incurred
by making such payments of additional rents and costs, for every one
dollar ($1) paid to lender or other parties to make up late payment(s)
and/or fee, premiums, etc., three dollars ($3) shall be credited off
the option price stated in the Residential Lease Purchase Agreement of
December __________________.
Once these payments/fees are made current, Tenant may make his or her
payments directly to the Lender and other parties for the remainder of
the lease period state in the Residential Lease Purchase Agreement
dated on ______________ between _____________________________ (Tenant)
and ____________________________ (Landlord).
These continuing payments sent directly to the lender or these other
parties shall be considered as rent (or other money due) received by
Landlord for compliance of Residential Lease Purchase Agreement
between these parties dated on ___________________, but shall not be
credited with the three for one credit detailed above."
For any questions, please comment below. For investment services, leave a message at 314-246-9484 ror you can email at dhibb99@gmail.com
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