Often times real estate investors have questions about Land Trusts & Lease Option Investing – and I often have answers! We learn best from our peers and “on the job” training per se.
Craig Warner, a real estate investor sent me the following questions regarding land trusts, lease options and working with his partner. Thought is a great share for REIClub.com investors.
Lease Option & Land Trust Investing Q&A
Craig: When doing a Lease Option when is this converted into a Land Trust? Reason why I am asking, doesn’t the Lease Option open the doors for a lawsuit to any party involved in the contract? Therefore wouldn’t one want to put this into a trust ASAP?
Randy Hughes: YES, YOU ARE RIGHT. YOU IDEALLY WANT THE SELLER TO PUT THE PROPERTY INTO A LAND TRUST IMMEDIATELY AND THEN YOU RECORD YOUR OPTION WITH THE TRUSTEE TO PROTECT YOUR INTERESTS.
Craig: My partner prefers doing a land trust from the start because of the less legal risk involved vs a Lease Option risk. On the other hand I have a very hard time selling the idea of the Land Trust because they give up the name on the deed.
Randy Hughes: I UNDERSTAND YOUR FRUSTRATION. IT DOES TAKE SOME EDUCATING TO GET THE SELLER TO COMPLY. START BY TELLING THE SELLER, “LOOK, BOB, I DON’T KNOW YOU AND YOU DON’T KNOW ME SO, TO PROTECT BOTH OF OUR INTERESTS LET’S PUT THE PROPERTY INTO A LAND TRUST (WITH YOU AS BENEFICIARY) AND THEN STRUCTURE OUR OPTION AGREEMENT AROUND THE LAND TRUST.”
WHETHER YOU USE A LAND TRUST OR NOT, BE SURE TO RECORD YOUR OPTION AND A MORTGAGE TO PROTECT YOUR OPTION INTEREST FOR A REAL BELT AND SUSPENDERS APPROACH TO OPTIONS.
Craig: I understand your recording the option but please explain the the Mortgage end of the statement above. My partner always makes sure a separate bank account is used for each property to protect any due on sale clause. Is this what your referring to?
Randy Hughes: THE MORTGAGE GIVES YOU MORE SECURITY. FOR EXAMPLE, AN OPTION CAN BE DESTROYED BY BANKRUPTCY OF THE CURRENT OWNER (EVEN THO YOU HAVE RECORDED YOUR OPTION). THE MORTGAGE WOULD BE ADDITIONAL SECURITY FOR YOUR OPTION AND YOU SHOULD RECORD IT FOR WHAT YOU ESTIMATE THE VALUE OF THE OPTION IS…TO YOU!
I hope sharing this Q&A helps you investors with your Land Trust and Lease Option Investing.