Details, Details, Details…!

-Sometimes It’s The Little Things…!

By Barney Zick
Investment Banker & Business Strategist

One nice thing about doing consulting with investor students is it gives me the opportunity to help iron out details that may come up in actual practice. These are often little details that are not as clear or obvious as the student needs. And if you are working on a deal and don't know the answers, it can be very frustrating. Here are some recent answers to detailed questions.

1. Question: I am buying a house using your lease option techniques and selling it at a higher rent and higher price with a "sandwich lease option". How should I work transfer of title policy from the original seller to my Lease Option buyer?

Answer: First, your option will require that the seller have good title. Sometimes you can get the seller to update the title policy when you buy the option but usually not. Many will order a preliminary title report for you and that has been good enough for me. If they don't, you should. This shows you that the property is currently titled properly when you are given the option. It will also show lien and pending suits, etc. I don't buy a policy at this time. I just sign the option and save the money. Remember, with you having an option, the property is still titled in their name so the policy they bought is still good.

Second, since I recommend that you use a local real estate contract to detail how the property will be closed in the event you choose to execute the option, that contract will call for the seller to give you a title policy at that time.

In the local real estate purchase contract, which will be attached to the option and be a part of it, the Buyer should be named as your Corporation (or Land Trust or whatever business entity you operate under) or Assigns (or you and your assigns).When you exercise the option, the actual new and current title policy will be due from the original seller. So before closing, you can assign the right to get the title policy to your lease option buyer by informing the title company the name in which you want it issued.

And what about the slim chance that the seller has an undiscovered title problem after the commitment is issued (when you get the option) and before you or your tenant buys? The original purchaser's title insurance probably won't help. It only covers up until the original owners bought. However you will have the seller themselves to go against. But most important, if you follow the advice (and forms) I have in my course, you will have filed a "Notice of Option" when you bought the option. That puts your claim ahead of anyone else's that makes a claim after you get the option. Lastly, if you do it right, you will have minimum cash involved, the risk is in proportion to your investment.

2. Question: Why does your lease option call for the use of a purchase contract like the ones customarily used by the brokers in the area? I'd like to use my own short form contract.

Answer: Not only is this the safest in that the "Standard" contract is approved for use in your area by local attorney's and may courts, it is especially needed when you are dealing with a Real Estate broker. If a licensed agent is involved on either side of the contract, they will insist on using the contract that has been approved by the local realtor board. Use the short contract at your own risk.

3. Question: How do I refer to my self in my contract with my sub-tenant who is in the second option position.

Answer: I assume you took the option in some entity name, lets say a corporation. To the sub-lease option buyer, you are the seller. Use your Corporation name, you are "the Holder of Equitable Interest". That correctly identifies your position. Try to keep the issue of who holds the title until the end of your negotiations. Don't lie. But leave it to last.

4. Question: Is the option spread and / or the option deposit taxable?

Answer: If the spread is called option consideration, it is not taxed until the option expires, terminates or is exercised. If it is called rent, it is taxable as rent.

5. Question: If an Optionee records something against my property asserting a lease option right, how do I get a release (if the Optionee defaults or does not exercise the option)?

Answer: I'd rather they not file anything. I don't bring it up or make the suggestion. Some people put in their agreements that the sub-option holder cannot file anything! (I'd never agree to that, but some folks do.) However, if they want to file a Notice of Option at closing, have a Quit Claim Deed also signed by them at the same time releasing their interest. It can be held in escrow pending a default. I suggest my lawyer hold it with instructions not to release it unless tenant is sufficiently in default that an eviction action COULD be filed.

If they file something on their own, without your knowledge or signature, and then later default on the lease, the eviction suit needs to also address this issue. (This brings up another point, make sure and run a preliminary title search, just before your lease option tenant moves out to see if they have recorded anything.)

If they move out, and you LATER find something recorded, you need to clear the title as you would with any title problem. If there has been a successful eviction suit, and the document they filed only has their signatures and not yours, a title company may be willing to insure around the self-serving filed notice.

As is often said in legal matters, the devil is in the details and these details can become very important. It is always good to have a good lawyer on your team, one who is knowledgeable in real estate and one who will help you modify the documents you want to use rather than starting from scratch every time you do a deal!