Wrap vs Lease Option



From: Miakat .

Hi all,

Here's the situation. I have a client who really wants their own house. Currently they cannot get bank finance due to a poorly performing business. They are trying to get rid of the business at the moment, so I can see that in five years time, they might be able to get their own finance.

My question is: Would this be a scenario in which a Lease Option would work best? I know how the wrap (installments) work but haven't heard much about the lease option scenario.

Help would be appreciated.

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Reply: 1
From: Damien Dupont

Hello Mia,

Have you ordered Andrew G.’s “Aust. Lease/Option handbook”? I recommend it as a good read if you haven’t.

I have not implemented either technique as yet, but as far as I can see, the L/O appears much easier to implement from a legal perspective. All you would require is your standard REIV (or equivalent in your state) Lease agreement, plus a separate option contract specifying the details of the sale (strike price, expiry date, option fee, special conditions, etc..).

There are a couple of catches though. The first, you state: “in five years time, they might be able to get their own finance”. Obviously, with the L/O they will eventually need to qualify for conventional finance to exercise their option. This is not a requirement for a wrap as you would in essence be the finance provider.
The second relates to the property maintenance. You may have a challenge with passing on the maintenance costs under a L/O to your buyer as this is generally barred by most of the states’ residential tenancies acts. However, Owen posted an interesting excerpt on www.creativerealestateinvesting.com.au back on the 21-Feb-2001 pertaining to the NSW Act:

RESIDENTIAL TENANCIES ACT 1987 - SECT 6 6 Agreements and premises to which Act does not apply
(1) This Act does not apply to a residential tenancy agreement:
(a) if the tenant is a party to an agreement made in good faith for the sale or purchase of the residential premises,

Check with your solicitor.
All the best,

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Reply: 1.1
From: Owen .

I finally heard back last Friday from my solicitor about that clause and she said that it does not apply as an Option is not an "intent to purchase", it's just an option to purchase which isn't enough. Apparently this has been proven may times in various tribunal cases.

I still can't see what the problem with having a clause in the Option contract to say that the Option Holder is responsible for maintenance of the property. It still means that the tenant still gets their maintenance done. If the Option Holder also happens to be the tenant, then so be it.

Still following this one up but let me know if you find anything more out.
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Reply: 1.1.1
From: Frode Egeland

If there is a need for 'intent to purchase', perhaps you could word your option to be more of an 'agreement to purchase within x years' and leave an escape clause for your buyer/tenant in case they do not wish to exercise the option.
Just a suggestion.
Instead of asking your solicitor *if* something can be done, you may wish to ask *how* it can be done.. :)

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From: Sim' Hampel

On 3/5/01 5:22:00 PM, Frode Egeland wrote:
>Instead of asking your
>solicitor *if* something can
>be done, you may wish to ask
>*how* it can be done.. :)

Now where have I heard that in the last week or so ?


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From: Owen .

We've discussed doing long settlement purchases with an exit option as you described. She is currently getting the details together for me so I can see if the numbers still work out.

The only down side to this is the stamp duty would be required within 3 months of exchange and this could be an issue for the T/B. I would have to shuffle the figures a bit to keep it attractive for them and have to see about non-refund clauses for deposits and installment payments otherwise I could get stuck with a big refund a few years down the track. As a purchase they would have claim on equity in the property compared to an option which is just that, an option.

The search continues. Anyone actually doing lease/options out there?
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