[BROKERDIRT] RESIDENTIAL LEASE

[Richard Schreiber]

Greetings Listmates:

 

I need a form of residential lease which contains an option to purchase, where a portion of the rental payments are dedicated by the landlord to an equity fund, with an option to buy when the equity reaches a certain level.  The fund then becomes the down payment on the purchase by the tenant.  Does any of you have such a form that you could share with me off line?  I will be much obliged, as always.  Richard

 

Richard D. Schreiber, P.C.

The Kearns Law Office

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St. Louis MO  63128-1381

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[HalSchi...@verizon.net]

I have seen a few lease-purchase agreements of this sort, 

and drafted a few; I want to start by saying that I have never seen one go as planned.

My first thought is, two separate but simple documents are better than one complext one.  Why not do a normal residential lease agreement, and do a normal residential purchase agreement with a credit towards purchase price.  Both can be based on your state Realtor's standard forms.

I say this because, separate agreements avoid several issues-

whether a technical breach of the lease prevents exercise of the purchase addendum, who holds the escrow, whether the escrow conflicts with legislative limits on how much of tenant's money a landlord may hold in escrow (one month here in PA).

If you do a lease with option to purchase, I would phrase it as an option to come in and do a full, normal agreement of sale.  

I would also suggest that to avoid disputes about whether the option WAS exercised, specify that exercising the option requires specific formal and financial acts, e.g. fill out an agreement of sale, and make a deposit of $1,500.

I don't like landlords giving credits. Figure out a fair lease price, use that.  Figure out a fair purcahse price, use that.  Otherwise, the result seems like Tenants over-paying for the rental, and Landlord undervaluing the property.

I also don't like Landlords holding, or being responsible for Tenants down money.  If the deal is going to take a significant amount of time, the Tenants money should be earning interest during that time, either put the money in the tenant's 401k/retirement plan that allows tax free growth and withdrawls for first time home purchase, or at least a money market mutual fund.

I also don't like Tenants relying on Landlord to save for them. Tenants may need to clean up their credit to get a mortgate, 

but they also need to show/learn to control cashflow and how to save money.  If the Tenant/Buyer can't come up with 1% down for e.g. a US Dept. Ag. loan, then they can't afford to fix a broken heating system and frozen plumbing, and don't really have any business buying a house at this point.

Hal Schirmer Esq (Realtor and Attorney)

315 North Main Street

Telford, PA 18969

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[Samira-Broker Dirt]

Richard,

I don’t have one to fit your particular fact pattern.  I would either custom draft one or use a lease agreement prepared by your realtors association depending on whether I’m retained as an attorney or realtor to do the job.  Then I would attach the pre-agreed upon Purchase Agreement as an “exhibit” to the lease agreement.  This way, the parties have already agreed upon the language of the purchase agreement they will eventually sign. for the price you can agree upon the fair market value as derived by any number of factors X dollars per square foot, or X times income, or as appraised by X which the parties can designate ahead of time.  That way there will be no future disputes (hopefully) as to value which comes up a lot in litigation regarding such matters.

 

As for the equity fund, that may be asking for trouble.  The simpler the better.  Have the lease payments go toward the purchase price and the downpayment can be held in trust in an interest bearing account. But your particular state may have restrictions on how long funds can be held and impose regulations on trusts.

 

Regards,

 

Samira Kermani, Esq.

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From: BROKERDIRT - Real Estate Brokers Discussion Group [mailto:BROKE...@LISTSERV.UMKC.EDU] On Behalf Of Richard Schreiber
Sent: Monday, January 11, 2016 1:17 PM
To: BROKE...@LISTSERV.UMKC.EDU
Subject: [BROKERDIRT] RESIDENTIAL LEASE

 

Greetings Listmates:

 

I need a form of residential lease which contains an option to purchase, where a portion of the rental payments are dedicated by the landlord to an equity fund, with an option to buy when the equity reaches a certain level.  The fund then becomes the down payment on the purchase by the tenant.  Does any of you have such a form that you could share with me off line?  I will be much obliged, as always.  Richard

 

Richard D. Schreiber, P.C.

The Kearns Law Office

10024 Office Center Ave., # 203

St. Louis MO  63128-1381

314 849 5828

314 754 9949  Fax

314 420 2112  Cell

E-Mail:  ri...@swbell.net

Web:  www.rdschreiber.com

 

Confidentiality Warning: Under an informal ruling by the Office of the Chief Disciplinary Counsel for the Missouri Bar, communication by e-mail is deemed not necessarily secure and confidential.  Further, this e-mail contains information intended only for the use of the individual or entity named above.  If you are not the intended recipient, or the employee or agent responsible for delivering it to the intended recipient, you are not authorized to read, copy, distribute, or use this information.  If you have received this transmission in error, please notify the sender immediately and then delete this message.  Thank you.

 

 

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[Bill Gulley]

Good afternoon to all,

I'm new to this site, this being my first post. I spoke to Richard yesterday about  this matter simply because there was so much to cover and I dislike typing, but I thought it best to point out some of issues that cause concern for practitioners today.

First off, the old rent-to-own or lease with a option to purchase with credits given toward the purchase price from rents is a financing arrangement under Dodd-Frank which requires the tenant to be qualified through a formal process. While there are exemptions to seller financed consumer loans, a landlord will be seen as a dealer, not an occupant selling their own home. Commercial transactions are exempt, but this is a residential unit and falls under the consumer lending umbrella.

Another matter with applying credits toward the purchase, regardless of the type of property or use, when the optionee applies for financing the lender will require an appraiser to assess the fair market rents at the time of application. Only the amounts paid in excess of the fair market rents may be credited as the down payment. This generally leaves the optionee short of the down payment they thought they had to meet the loan to value loan requirements. While the contract may be closed as agreed, the purchase money loan must follow this prudent lending practice.

Because of this, it is always best to use two separate contracts, a standard lease agreement and an option agreement, the "American Option" being the most popular.    

Another issue is under past practices of having a tenant responsible for maintenance and repairs, this is not acceptable for residential  properties due to the depreciation requirements of the owner for investment properties, depreciating assets not paid for by the owner is frowned upon, not taking the depreciation is also an issue, don't we love the IRS?

Commercial leases do allow setting expenses off to the tenant as a commercial tenant has a leasehold interest that can account for expenses of improvements and repairs, a residential tenant doesn't have this available to them.

In 2016, we also have the matter of the IRS determining the intent of an option and if the intent is to sell, if it is, it is treated as a sale which triggers the seller to gains on the are, unless it then qualifies as an installment sale, along with 25% of the depreciation being taxable at that time. Some of these lease-option deals have been done with insufficient funds to pay the seller's taxes.

Accounting changes also take effect this year, regardless of a seller being a public or private entity, GAAP accounting will bbe applicable to the recognition of sales using an option contract, the seller must recognize the sale to account for their assets and liabilities being reflected properly to the capital  account. 

As to intent of a sale, it is best to clearly state in the option that the option is not intended to be a sale at the time of contracting and provide a reason that the contract is an impossibility for the optionee to perform, such as requiring sufficient savings for loan requirements.  

If the transaction does qualify as an installment sale, the taxable amount for depreciation is still due but gains are deferred until received as a percent of the sale amount.

Under Dodd Frank, a financing agreement is any agreement whereby any payment is made that reduces the agreed sale price and the seller'lender holds a security interest in the property sold or has the means to declare default of payment and avoid the sale. (Such as a contract for deed).

So, there are two  key issues as to a financing agreement, 1 payments reducing an agreed price and 2. a security position with respect to the property sold.

This is why I suggest simply leasing the property, a lea may have performance required. Rents may be paid and the lease remains in good standing so long as the tenant continue to shows an agreed savings pattern which can limit the risks of the owner in the event of damages or loss of income, an asset qualification. 

Then under a separate option agreement, no strings attached at the agreed strike price. An option price can be ascertained as to the value of a property, so option prices for residential properties probably should not exceed 10% of the value over a 3 year term, less proportionately for shorter terms. 

Optionees that obtain an equitable interest in an option (unlike a sale contract where an interest is gained in the property) state law may then require foreclosure on that interest and without a security agreement a judicial foreclosure is likely to be required. 

The tenant then simply pays rents as agreed and provides proof of deposits to a savings account, unofficially earmarked for the down payment. This savings account may also be pledged to a landlord as security under the lease agreement with the right of set off.

Financing the option price to a tenant-buyer is also a financing arrangement if the option price is credited to the sale price.

As to a residential sale price, lease-option to  purchase contracts have basically been tagged as a red fag to predatory dealing and lending, as sellers were taking an option price, the buyer failing due to poor underwriting or over pricing that failed to appraise for loan purposes. This is another issue under Dodd-Frank with an owner occupant buying.   

Another aspect of old practices which are unacceptable now is placing contingencies or requiring performance by an optionee, this violates the spirit of a unilateral contract to a bilateral contract causing the option to be found to be an installment sale. 

BTW, I am a retired investor, past bank examiner for FDIC, owned a mortgage operation, I was a registered creditor's representative in bankruptcy court, taught real estate, finance and still do along with real estate investment strategies. No. I'm not a guru!

Hope that provides some current insight to the real estate options world as it has changed recently. 

All the best,

Bill Gulley   

 

   

 

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[Richard Schreiber]

Bill:  Thanks again for your comprehensive and sage advice.  You really extended yourself, and I appreciate the professional courtesy very much.  Richard.

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[Richard Schreiber]

Greetings Hal:  I have been remiss in responding to your recent e-mail, in response to my post on BrokerDirt.  Your words of wisdom were spot on, and I have been guided by them.  You went out of your way, and I appreciate the professional courtesy very much.  Best Regards.  Richard. 

 

From: BROKERDIRT - Real Estate Brokers Discussion Group [mailto:BROKE...@LISTSERV.UMKC.EDU] On Behalf Of HalSchi...@verizon.net
Sent: Tuesday, January 12, 2016 6:57 AM
To: BROKE...@LISTSERV.UMKC.EDU
Subject: Re: [BROKERDIRT] RESIDENTIAL LEASE

 

I have seen a few lease-purchase agreements of this sort, 

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[Mark Randall]

What effect would the bankruptcy of either the landlord or the tenant in this arrangement have?  Could one contract be accepted and the other rejected by the debtor?

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[Samira-Broker Dirt]

Richard, thank you for your kind words. It was my pleasure.

 

Regards,

 

Samira Kermani, Esq.

Broker/Attorney/Mediator/Author/Lecturer/Keynote Speaker

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From: Richard Schreiber [mailto:ri...@swbell.net]
Sent: Saturday, January 23, 2016 7:02 AM
To: samira-b...@karltonstone.com
Subject: RE: [BROKERDIRT] RESIDENTIAL LEASE

 

Greetings Samira:

 

I have been remiss in responding to your recent e-mail, in response to my post on BrokerDirt.  Your words of wisdom were spot on, and I have been guided by them.  You went out of your way, and I appreciate the professional courtesy very much.  Best Regards.  Richard. 

 

 

Richard D. Schreiber, P.C.

he Kearns Law Office

10024 Office Center Ave., # 203

St. Louis MO  63128-1381

314 849 5828

314 754 9949  Fax

314 420 2112  Cell

E-Mail:  ri...@swbell.net

Web:  www.rdschreiber.com

 

Confidentiality Warning: Under an informal ruling by the Office of the Chief Disciplinary Counsel for the Missouri Bar, communication by e-mail is deemed not necessarily secure and confidential.  Further, this e-mail contains information intended only for the use of the individual or entity named above.  If you are not the intended recipient, or the employee or agent responsible for delivering it to the intended recipient, you are not authorized to read, copy, distribute, or use this information.  If you have received this transmission in error, please notify the sender immediately and then delete this message.  Thank you.

 

 

 

From: BROKERDIRT - Real Estate Brokers Discussion Group [mailto:BROKE...@LISTSERV.UMKC.EDU] On Behalf Of Samira-Broker Dirt
Sent: Wednesday, January 13, 2016 12:27 AM
To: BROKE...@LISTSERV.UMKC.EDU
Subject: Re: [BROKERDIRT] RESIDENTIAL LEASE

 

Richard,

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