Rent with Option to Buy

[Bmok]

Hi all,

One of the strategies that we am looking at is the "Rent Option". This is where we rent our IP out to our tenant over the next 5 years while giving them an Option to purchase it at the end of that period. This "Option" will be attached to a Purchase Contract that will be signed by all of us in 5 years time. We will both hold a copy of the "Option" and the Purchase Contract.

A friend reckons the Banks don't like this type of deal and mentioned that their mortgage documents also says that we have to let them know if anyone else has an interest in our properties. Is this correct?

We realize that the Bank would soon find out about the deal if the prospective purchaser (our Rent/ Option tenant) put a Caveat on the property to protect their interests.

Cheers,
Bernard

 

[Nigel Kibel]

lease options

Hi

The simple solution is that there is no need to tell the bank.

As far as the bank is concerned you have a solid lease. if you have set this up well it should appear to be positive cashflow.

I am not sugesting you do anything wrong. What you tenants have is an option to purchase, until they exercise the option they are just tenants, afterall if they do not exercise the option you will still own the property.

Should you need any help send me a meaage or email me

regards
property know how

nigel kibel

 

[Bmok]

Hi Nigel,

Thanks. Thought that would be the answer but I just wanted it confirmed.

Cheers,
Bernard

 

[duncan_m]

Re: lease options

Originally posted by nkibel
Hi

The simple solution is that there is no need to tell the bank.

Actually, this isnt correct.. almost all mortgage agreements would prohibit you signing an option to sell or signing a lease longer than 12months withouth seeking the banks consent as any such action makes the property extremely difficult to sell should you default on your payments and they need to sell as Mortgagee in Possession.

 

[abcdiamond]

Must agree with Duncan on this,
my mortgage document says:

You must get our consent before you:
g: deal in any way with the property, this mortgage or any interest in them, or allow any interest in them to arise or be varied.

However, I'm not sure what the bank would or could do if you didn't tell them. Not sure I would want to find out the hard way though.

Play safe and tell them.

 

[Nigel Kibel]

options

You could cover yourself regarding the contract by making sure the clauses are covered.

You could have a default clause in the option agreement, that if you were forced to sell the property then the person with the option would have first right to exercise at an agreed figure.

Regards
Property know How

Nigel Kibel

 

[Lofty]

Hi All

Why not get your underlying mortgage from a lender to which you can fully diclose that you will be "wrapping" the property, ie. via a Lease/Option or an Installment Contract.

We have a lender who is happy to accept our disclosure. And apparently there are quite a few such lenders in the "securitised lenders pool".

Cheers, Lofty

 

[Garry K]

Hi all, my 2 cents worth.

If I was the tenant is this situation, with the option to buy, the first thing I would do is put a caveat on the title to protect my interests, ie stop the owner from selling it to someone else or motgaging it up to the hilt and having a forced sale.

In which case, the owners bank will find out eventually.

Garry

 

[Nigel Kibel]

lease options

Options are commonly used for developers, and investors, If the option agreement is drafted correctly the the property cannot be sold as the tenant has the option to purchased. However the fact remains that the person who owns the property continues to do so until the option is exercised. If you build in the capital grown slightly discounted eg $350000 today option figure $514,000 in 5 years, that represents 8% per annum, the real figure may have been 10 or 12%. The question I have is why it an issue for the bank, the morgage is you responsibity. If you set this strucure up properly it can be positivly geared allowing you to buy a number of them. You do this by increasing the rentby say $100 per week and that money goes towards the deposit. By doing this it increases the return and gives the tenant a deposit.

There are other Ways to make the deal more attractive

Regards
Property Know How Pty Ltd

Nigel Kibel

 

[abcdiamond]

Re: lease options

Originally posted by nkibel
If the option agreement is drafted correctly the the property cannot be sold as the tenant has the option to purchased.

Nigel

The part of your comment above is the reason that the bank would need to know. Part of the agreement that the bank has with the borrower, is that the bank has the option to sell if the borrower defaults.

example scenario:
Lets say that the property is valued 250k, and the option to sell is at $300k.
property values rise to 500k, (massive CG happens) and the borrower refinances to $400k.
Borrower then defaults, owing bank 400k, but the option to purchase at $300k is exercised. Result: the bank is out of pocket by $100k.

I don't think the bank would be happy. If they were aware of the option to sell, they would have had the opportunity to not increase the mortgage.

I would say, play safe, and keep the lender informed, as per lenders requirements. After all, the borrower has agreed to these terms when taking out the loan.

 

[paulzag]

Re: Re: lease options

Originally posted by abcdiamond

example scenario:
Lets say that the property is valued 250k, and the option to sell is at $300k.
property values rise to 500k, (massive CG happens) and the borrower refinances to $400k.
Borrower then defaults, owing bank 400k, but the option to purchase at $300k is exercised. Result: the bank is out of pocket by $100k.

I think that's why Nigel said drafted correctly .

Yes the bank can and should find out. They do that when they approve any increase. The borrower needs to tell the bank everything relevant to assessing the risk, including the existence of the option (whose holder should have their interests recorded).

There are centuries of common and statute banking law dealing with preferences at possession.

Why do people say something can't be done when logic and history show that it can. Again to quote Nigel developers use options

Here's an example

1. First mortgagee in possession auctions a property at above market valuation and in excess of their debt.
2. The second mortgagee claims a preferrence over some of the funds, they get paid out, leaving
3. First mortgagee still owed money and calling on the personal guarantors.
   [/list=1]
   It flies against conventional wisdom around here. But it happens all the time.
   
   Regards
   
   Paulzag
   Dreamspinner

 

[triple_j]

Hi Paul, Nigel,

I'm brand new to the lease option concept and want to get my head around it. What is the order of execution of a typical lease option agreement?

I imagined the typical order is : as an investor, I talk to the bank first to get the loan. I let the bank know that I am planning to lease rent the property to John Dole. Later, John Dole turns up (it may take time to get a person who wants to go into an agreement like this) we sign a lease option.

OR is it I have to get John Dole first and we go to the bank together and all three parties sit down to sign mortgage document and lease option?

There are no property management agent in the picture right? How do I make sure John Dole is credit worthy and is committed to pay extra per week towards the home? Is this a calculated risk I have to take?

Thanks guys,
TJ