Pro-Seller Option Form

Here is a form that might be used by a Seller planning to lease option a property they own. While I am not an attorney, this should not be construed as legal advice. Laws of each state vary, and it would be good to have this document reviewed by your attorney prior to use. But it may be a good template to begin discussion.

OPTION TO PURCHASE

THIS AGREEMENT made this day of , 20 between,

, Optionor, and

Optionee.

IN CONSIDERATION (which will be applied toward purchase price) of the sum of

paid by Optionee (the receipt of which is hereby acknowledged by Optionor) the Optionor gives to Optionee the exclusive option, right and privilege of purchasing certain Real property located in the

County of and State of , described as:

This option is subject to the following terms and conditions:

1) This option is not assignable by Optionee unless Optionor agrees separately and in writing.

2) There shall be additional option consideration of $ per month given to Optionee. The

monthly option consideration shall be credit toward the down payment/purchase price of the

property. The credit will only apply to months when the rent amount and any outstanding fees

owed (in the attached Rental Agreement) is paid on or before the due date and in full.

3) Optionor grants Optionee the right to exercise this option for a period commencing on

, 20 and terminating at midnight, , 20 . If not exercised, this

option shall expire midnight , 20 , and Optionor shall be released from all

obligations hereunder, legal or equitable. The obligation shall cease and the consideration here

above receipted for the Optionor, shall be retained by Optionor.

4) If Optionee elects to exercise this option the sale shall take place according to the terms of the

attached offer to purchase agreement, which have been signed by Optionee and Optionor

this same day.

5) Notice of election to Purchase shall be given by Optionee in writing, and by registered mail,

addressed to Optionor, at:

6) All provisions of the Rental Agreement between Optionor and Optionee pertaining to the

aforementioned property shall be performed by Optionee or this option may be withdrawn by

Optionor and Option consideration will be forfeited by Optionee.

7. OPTIONEE agrees to accept subject property in current “as is” condition. OPTIONEE agrees

to make all repairs major and minor to the above named property. Should OPTIONOR

be required to make repairs of any kind whatsoever to the property, the cost of such repairs

shall be added directly to the purchase price stated in the purchase agreement.

If there is a septic system, Optionee agrees to pay for and have the septic tank pumped out

on June 1st of each year this agreement covers.

If there is a pool Optionee agrees to open and close pool each year, and to maintain the pool.

8. OPTIONEE agrees to pay for any and all additional assessments incurred during occupancy

And prior to ownership (example but not limited to: water, sewer, sidewalks, or road paving)

9) The option consideration is for the sole purpose of granting the OPTIONEE the exclusive

right to purchase the subject property at the stated price and terms.

IN THE EVENT THAT OPTIONEE DOES NOT MEET THE TERMS AND CONDITIONS CONTAINED IN THIS AGREEMENT ALL OPTION CONSIDERATION PAID WILL BE FORFIETED BY OPTIONEE AND WILL BE KEPT BY OPTIONOR.

Initial ________

10) This option to purchase will be terminated and all option consideration forfeited, if payment

required on option agreement or any payment required on rental agreement is late for more

than ten days past the due date. Optionee understands that Optionor will be required to supply

their mortgage company with an accurate record of payment history including all instances of

late payments. Optionee understands such information could affect their ability to secure a

mortgage

11) This option to purchase shall apply to and bind the heirs, executors, and administrators

of the respective parties.

12) Optionor may be doing a 1031 exchange on this property and needs 30 days notice of closing

to work out the details with the title company and purchasing of another property.

13) If option money is forfeited by Optionee, for any reason, then the rental agreement will

automatically revert to a month to month agreement, so that Optionor may sell or re-lease the

property.

14. Optionee agrees that they will not record anything against the title, of said property, prior to

closing and owning this property.

15. Optionee understands that Optionor does not hold title (own) this property, but is transferring

their interest in the property. If Optionor can’t transfer title due to something out of their

control (ie.owner refuses to close or can’t transfer clear title). Optionor will reimburse Optionee the entire option consideration plus an additional A$500 for their inconvenience, as full and complete liquidated damages for Optionor not being able to close on this property.

15. EQUITABLE MORTGAGE: This Option to Purchase is not, and shall not be construed as, or

interpreted as any form of EQUITABLE MORTGAGE. It is hereby declared that it is not the intent of the parties to create a loan of any nature or to create a mortgage of any kind. In the event that the Optionee hereunder should ever raise such an issue in a court of law or otherwise this Option shall terminate immediately.

15. Optionor has advised the optionee to seek the advice of a mortgage lender and attorney prior to

signing this document.

18) Time is of the essence in this agreement.

The parties have executed this agreement on the date first above written.

Optionor(s): Optionee(s):

Witness: Witness:

Happy Investing!

Lease Option Vs Land Contract

Which formula is better? Lease option? or land contract?  It depends on the situation and your goals.

A lease option transaction is not a sale, so you will benefit from market appreciation if the tenant declines to exercise his option to purchase.

A contract for deed sale will allow you to get more a down payment from the buyer, since it feels more like a sale. In higher priced neighborhoods the rents may not command enough rent to cover your underlying mortgage payments.

A contract for deed (CFD) sale will allow you to collect interest payments, which are generally more than you could collect in rent. On the other hand, a property sold is already sold for tax purposes; thus, you cannot use a 1031 tax-deferred exchange on a property sold by contract for deed when the buyer pays off the debt balance. The entire balance paid on the contract will be due as a capital gain, which can be a huge tax liability if you have a low basis in the property. Furthermore, a defaulting buyer on a contract for deed is generally harder to get out of the property, particularly in a court proceeding.

Summary on the Pros and Cons of Each

In summary, the benefits of lease options are:

• Legal control of the property
• Ability to claim depreciation
• Ability to defer gains by 1031 exchange

The downside of lease options are:

• Less of an incoming payment
• Continued landlording responsibility

The upside of the CFD is:

• More money down
• Higher monthly income
• No landlording headache

The downside of the CFD is:

• Potential tax hit
• Transfer tax due at sale

You must decide on a deal by deal basis which transaction works best for you in terms of work involved, tax issues and, most importantly, cash flow. And, be flexible and know how to do both types of transactions; you can buy on a contract for deed, then resell on lease with option. You can buy on lease/option, sell on lease/option.

Conventional vs. Portfolio

Are you a full-time real estate professional? Do you have income from multiple sources or multiple businesses? Do you do non-traditional leasing, for example month-to-month rather than 12-months?

If you answered yes, then you may have a difficult time getting conventional financing to purchase new property or to refinance an existing property - even one that cash flows over $2500/month. Ask me how I know.

Here are the comments from a conventional mortgage lender regarding my personal situation:

there are so many different aspects to your loan file, that it’s going to take a really long time to process and underwrite your loan file.  We can do it, but I want you to know that’s going to be no easy task.  As far as I know right now, we need to document two businesses, self-employment income, 3 rental properties, pension income, 10+ lease agreements, unconventional private mortgage, and misc odds and ends...I cannot guarantee anything at this point since your income has so many determining factors now that only when an underwriter is able to fully process your loan will we even know what we can work with. 

 And here are the comments from the portfolio lender to whom he referred me:

If you want to submit your application(s) for purchase and refinance, I will need to have your completed loans application(s), signed disclosures (2 sets if you apply for 2 loans), and application deposit of $32.33 (only 1) as requested last week.  I would also want to see a letter from you summarizing your business plan of month-to-month room rentals, including how your Oklahoma rentals are managed, etc.  This is a complex request, and while I am happy to take it on, I need your full commitment to  the process if you want a decision.  There are just too many facets and our UW will want to see the full picture. This isn't a 'quick' let me run this by you question.  We are a portfolio lender, which allows us to review requests that are out of conforming guidelines, but that sometimes means borrowers have to provide more information to support their request to help our UW's  understand their business or situation in order to take on additional/different risks.

While [your previous conventional lender] provided me with information, I cannot move forward until I have completed information from you.  We have 'lost' 5 days since I sent our application, disclosures, etc. to you. I spent part of my weekend reviewing your information and determined that this is not one that I can just 'run by' underwriting.  If you want my full attention, you will have to commit to providing everything needed to move forward.  I will be happy to do my part with a complete sense of urgency, but I need your help.

Keep asking around for other lenders. I have found a great portfolio lender at Sound Credit Bank who is happy to do my loans for me, without the hassle described above. And I am sure there are others out there. So dear readers, if you have a Seattle-area lender who has worked miracles for you, be sure to leave a comment and recommend them here.

Happy Investing!

Negotiation Checklist

What are the creative finance terms you might offer to a seller willing to provide owner-financing?
Here is a checklist of various options an investor might present:

1.                   UNSECURED NOTE

A.     UNSECURED BY COLLATERAL

B.     LOW INTEREST RATE

C.     LONGEST TERM

D.     NO MONTHLY PAYMENTS

2.                   MORTGAGE ON ANOTHER PROPERTY

3.                   MORTGAGE ON SELLER'S PROPERTY

4.                   TRADE PLUS NOTE

5.                   TRADE PLUS MORTGAGE ON ANOTHER PROPERTY

6.                   TRADE PLUS MORTGAGE ON SELLER'S PROPERTY

7.                   TRADE

8.                   CASH PLUS NOTE

9.                   CASH PLUS MORTGAGE ON OTHER PROPERTY

10.               CASH PLUS MORTGAGE ON SELLER'S PROPERTY

11.               CASH PLUS TRADE

12.               CASH PLUS REFINANCE

13.               ALL CASH (PAYOFF SELLERS)

 Happy Investing!

Creative Seller Terms

LET'S TAKE A TYPICAL $100K HOUSE. SELLER OWES $50K. YOU MIGHT.............

1. Assume underlying ...Seller carry back $50k second deed of trust or unsecured note.
2.  New loan for $70K...Seller carry back second for $30K...notice the low loan to value for the lender in first position.
3.  New $100K wrap loan. Pay to escrow on the whole $100k and escrow pays the $50k underlying out of payment. ..Balance goes to seller.
4. Seller refi 80% LTV (Loan to Value) ...Payoff the $50K ...Seller gets $30k net from refi...You assume $80K...Seller carries note in second position for $20K plus fees to refi ...Say $22K.
5. Give seller $60K down, with note for $40K secured by a second position equity in another piece of real estate. Get a 75% LTV loan on subject property ....Out of this $75K pay off the 60K down and walk out of escrow with $15K in your pocket.
6. Get a construction loan based on the future value of subject property ....fixed up say it is worth $130K....borrow 75% and have seller carry back second DOT for one year...$25K on note...The cost of loan is or $97,500. But they give $75K at ·closing. Use $12,500 to fix up the house out of the $22,500 available to do so ...Put $10K in your pocket out of the "pull-out" of the cost breakdown ...cost loan. When job is done...refi the property based on its new value for 90% LTV... ($l17, 000.) Payoff the $97500.construction loan ...payoff the note for $25K with the seller and you still have $4500 left over from the pull-out of the cost loan. Not bad, huh? A new house and $4500.00.
7. Offer $105K for property on a wrap (all inclusive trust deed) with terms of 8% per annum with a cash out in 10 years.
8. Substitute what the seller needs in trade for the down payment.
9. Assume $50K seller carry. back, $30K on a third deed of trust. Open second position for a ·second mortgage to go to a lender and borrow the $20K to give to the seller as down payment.
10. Does 'the seller really want to sell or do they just need some capital and their equity is their only source? What about a life estate?
11. Offer all cash at a discounted price contingent upon the underlying discounting for cash as well. Then get a new 80% loan to value loan to cash out all involved.
12. Bring in a financial partner to put up the down payment in trade for a favorable return on his investment.
13.  Bring in a financial partner to share in the equity of the subject property.

Options are another great way to keep an offer open.

A FEW BASIC MECHANICS

•  Offer earnest money with a note due at closing whenever possible
•  And or Assigns always as the buyer
• An understanding of Subordination agreements
• An understanding of Substitution of Security
•  An understanding of how to handcraft your cash flow into the offer.
• Remember that the first years of property ownership are the most crucial cash flow years.

Happy Investing!