Watch Out for Lease Option Land Mines

Lease-Options and Seller Financing have become more and more prevalent in Salt Lake City since the market downturn.  In the right hands and under the right conditions, unconventional real estate transactions can save the day for both buyers and sellers.

Oliver Frascona, Esq. I attended a fantastic course led by real estate attorney Oliver Frascona, Esq.  He revealed several hidden land-mines inherent in using Lease Option Contracts (one of which cost me $32,000 in attorney’s fees in 2009). 

Lease option contracts are not bad.  But in many cases, it may be better to have an attorney draft an All Inclusive Deed of Trust Contract (a.k.a The Wrap). Wrap contracts may have less risk, and may provide greater tax benefits to the buyer.

You’ll find that many real estate agents and title companies in Utah are weary of these types of contracts because of the Due on Sale or Transfer Clause included in most mortgages.  Essentially, the Due on Sale clause gives the owner of the loan the right to call the entire balance due and payable if the Deed is transferred to a third-party that’s not a signer on the loan. But the key concept here is the lender has the “right”, it does not mean that they will exercise that right.

Considering the problems that most banks are facing today, one would assume that last thing they want is to take ownership of yet another home; assuming all mortgage payments, taxes and insurance are current.

If a homeowner gets backed-up against a wall and can’t afford to make another payment, a lease-option or wrap transaction may be the best alternative.  It keeps the home out of foreclosure, reduces stress on the neighborhood and gives someone else a shot at home ownership.

I’m ending this post with a CMA disclosure: I’m not an attorney and I’m not licensed to provide legal advice in the State of Utah.  Utah REALTORS have the authority to execute State approved Short Sale Contracts, but the All Inclusive Deed of Trust contracts must be drafted by an attorney. In my opinion, the protection and benefits afforded by the wrap contract is worth the extra $350 legal fee and far out-way the risk of the Due on Sale or Transfer clause.

Want more details and a referral to a good real estate attorney?  Send me an email:  md@michaeldruce.com.  I’ll hook you up.