Wednesday, July 14, 2010

What should be in a Good Lease Purchase Contract

What should be in a  Good Lease Purchase  Agreement ?

Lease Purchasing is one of the most profitable and practical ways to be in real estate. You don’t need a bank or a pot of gold to get started. There is an absence of Tenant & Toilet problems (if setup correctly)!   It’s creative and even fun ! 
Lease Purchasing can also be a nightmare if you do not have the foresight to have well designed, strategically written contracts.

Recently I was asked by a reader (via our Web site where he could find good generic Lease Purchase contracts. To me that is like asking a neurological surgeon if he can recommend a do it yourself brain surgery kit and combination salad maker!

I advised the reader that there are generic contracts from several sources.  One such source is your local real estate agent or office.  They have the multi-purpose  fill in the many blank type forms.

The question remains, however, are they any good or even WORTH THE PAPER THEY ARE WRITTEN ON ?

My handy Law Dictionary defines Generic  as follows: Something not specific or not referring to a specific thing.

Generic contracts are just that generic.  They are designed with the one size fits all concept. In reality, they are not designed to protect you or your interest in the particular Lease Purchase transaction with which you are currently involved. 

I have collected many of these so called generic Lease Purchase contracts for years.  Not only have I gotten contracts from Realtors and stationary stores;  others came from the get rich quick, while staying in bed all day, books and seminars. They all have one thing in common. They’re garbage !  They are poorly written and lack the necessary clarity and/or specific verbiage inorder for the contract to be enforceable.

I have designed and utilize six specific contracts for my own Lease Purchase deals. Which one I use is determined by the hat I am currently wearing at the time. Am I the Landlord/Seller, the Tenant/Buyer or the Assignor/Assignee? Will I be Subletting, Assigning, Sandwiching, Pure Optioning or just quick flipping ?  

TIP: I always carry a couple copies of my Lease Purchase Contracts in my car’s trunk right next to my earthquake emergency kit* compartment.  An investor is always prepared !

Here are a few suggestions for items that should be contained in any Lease Purchase Agreement.  Some of these may seem like obvious inclusions.  Having been involved in Lease Purchasing for many years now, I can tell you that the obvious is not always so!

1. Identify the principle parties: Who is the Tenant/Buyer and who is the Landlord/Seller?
 It  might even be a good idea to do business as a corporation.

2. Location of the property: Use the parcel identification number (PIN) and the street address. 
There should be no mistake about which property you are dealing with.

3. Date and Signature: Make sure all the owners sign the contract.  This includes spouses, partners or anyone who has ownership or an equitable interest in the property.
Big problems  can occur with a Lease Purchase if you don’t have all the owners sign. Better yet, check the title, loans, etc.

4. Term: Be specific on the length of the contract.
Strategy Tip: If you are negotiating with the owner make the contract for as long as possible. If you are the owner or are subletting the property, make the contract no longer than one year. 

5. Be Specific: All the terms, including Price, Rent Credit, Closing Costs, Option Consideration, Financing and Escrow should be included.  No term should be ambiguous.  Be specific ! 

6. Right of Assignment:Be sure that you have the right to sublet-transfer and convey the property to a third and in some cases a 4th Party.

Generic Contracts, YUCH !!!  I would recommend that you never use a generic contract!  If, however, you choose to do so, have it reviewed by a competent attorney who is either a real estate investor or who specializes in real estate law.  (Sorry, it’s the Perry Mason in me!)  Better yet have him design an agreement that meets with your needs, expectations and of course, PROTECTS YOU. 

P.S. Without sounding too legalistic make sure your agreement also includes-Indemnification-disclaimer-notification and Force Majeure clauses too. There are several other clauses that can be also included to maximize your profits and decrease your expenses. Give me a call and we can discuss

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