Escrow Question for L/O

Why don't you just do a Lease option assignment collect you money upfront
and let her deal with it? Just find her a person willing to accept it.

Jay C

Thanks for your response. A Co-op L/O is the same thing.

But I don't want to leave my people to "have to deal with it". I want to help them in any way that I can. I am the expert. They have no clue what they are doing on this. That is why they are coming to me. I am not here to just get the money and run.

By doing a co-op or an assignment, I am not responsible for the pmts, ect, but I still feel that I have a responsibility to help this be a win/win for everyone and not just a slam, bam, thank you ma'm and off I go with the money. I will be there to guide them still.

I am just confused on how escrow works in this situation.

Karen

I am looking at l/o methods and I am confused here myself. If this is a co-op or partner l/o deal it I guess is a bit more creative then I'm used too. I just want to make sure I understand this correctly.

The partner is the home owner?

The non-refundable option fee (not option period fee) is what your talking about?

Now if I understand these two things correctly. This would be my advice from what I've learned. First I wouldn't have told her as the home owner how much the option fee would have been. The fee is to purchase the option to purchase normally to cover what is already owed in the case of a pre-foreclosure or it could represent an agreed upon amount to act as a security deposit for the owner but, either way it should also put money in your pocket for doing your job finding the home owner a tenant that wishes to purchase the house when they clear up their credit so the home owner can

#1 walk away from the property they do not wish to control any more.
#2 sell the property with a minimum costs to them.
**If the owner doesn't understand what the costs for selling a house with an agent are let the owner know. If she listed with an agent she would not get these costs recouped until the sell of the house if at all and there is a chance it will also cost her up to 6% commission to sell on top of it. You are asking for no money from the home owner, make that point very clear! I find it to be a great motivator over the phone.
The home owner costs if not living in the house, a vacant house (its been proven it will take much longer to sell a house if you live in it and it is very inconvenient to have to leave sometimes at a moments notice for a showing) are as followed:
-Vandalism from house being vacant
-Cost of extra insurance and hassle for that including it being on the home owners record for calling it in making their rates higher if they must and finding new home owners insurance tougher so I've been told I haven't experienced this myself
-House up keep
*Lawn maintenance, water and electricity to show the house, mortgage payments if there is one, and taxes on the property.

Now this isn't so bad if it is only one month. So it is best to understand what the Average DOM (days on the market) are for your area and let them know they would have to budget for that and don't expect it to be the minimum it could easily take longer. Those numbers are normally for houses in just remodeled condition. The best indicator is the higher price comps proving it was sold for after repair value not as-is like the norm on fsbo houses. As a result it could take double that time to find someone interested in putting more effort into doing the rehab or on the rare chance they are okay with the condition.

I explain to my potential client this is the reason why l/o method is so much better for them as those who don't have stellar credit and all the bells and whistles wouldn't be bothered with the lived in condition. Therefore eliminating the costs above and if you explain that you have a broker on your team that is checking these people out and they are putting skin in the game by providing that non-refundable deposit and you may or may not be requiring them to go to credit counseling in order to fix their issues and buy the seller and you out normally using an FHA loan.

If you did the first l/o contract correctly these tenants/buyers will be paying down the existing mortgage and you have it written you will purchase the mortgage as-is at the time of execution of option or be paying the agreed upon price less the paid amount during the lease period allowing you to mark the house up to the end buyer at say 80-85% of current ARV informing them they are getting a good deal 15-20% off the current market value when they purchase! This way they think, hey my rent money went towards something and not just into someones pocket...

Speaking about that...If you also did a good job with the leasing part of the contract you made money during this period also. So like Greg M. you made money in the beginning, middle and at the end! Good luck I really hope that helped.

If I understand correctly, don't quot me it would be best to speak with an escrow officer or attorney, but I believe you wouldn't be going to escrow until the execution of the option to purchase.

This is confusing Karen, have you talked to your attorney?

I have never heard of holding escrow on the option fee?

Thanks so much for responding. A Co-op L/O is just like a Wholesale L/O or assigning a L/O, just another term. There is no partner.

I understand L/Os through and through. My contracts and leases are definitely done correctly. Thousands of dollars have been spent on lawyers making sure they are right.

I also know that we don't close escrow until the execution of the option to purchase.

My ONLY question is, if the deal falls through somewhere in the middle (T/B backs out) then do I get my money that was put into escrow? Or does it somehow go to the seller? Or do we give the escrow company instructions on how it is to be dispersed in this type situation when we first open escrow?

I think I am needing someone like Gary and Jill Ceriani or Michael Mangham or Bill Pohl to answer this question. Some of the people who have done a lot of different types of deals. This is not a regular situation question.

I appreciate you guys trying to help me.

Karen

No, I haven't talked to my atty on this. Thought I would try here first with some of the more experienced investors.

I have never heard of it being held either. And I don't know that I will agree to it.

Karen

I would venture to say you should have an agreement signed by the T/B that the money they put down for the option to purchase is non-refundable and will be yours to use as you see fit in the case they back out. I would then provide that to the escrow agent as a type of invoice to be paid if they back out. Then you collect/deposit the check and find another T/B...Hopefully that answered your question?

"Am I not getting it here? Or are her "advisors" confused? I am not really seeing the benefit for her. In actuality, if they fall out of escrow, I would get my money sooner. Am I the one that is confused?"

Basically, half of your option money is contingent on the deal closing. In actuality, only 40% of lease options are actually exercised. Having that in mind, if everything goes as planned, the option is exercised, house is sold, you get the remainder of your option money. The benefit to her comes if the deal doesn't close. The seller now has a vacant house on which payments will have to be made, and possibly some repairs. Once the deal is accepted, you have zero risk. It's not like you are guaranteeing to make the lease payments if the deal goes south after 24 months, or assuming responsibility for any needed repairs. Less risk, less control, less profit. More risk, more control, more profit. The seller can use your portion of the option money to make payments and repairs. She has some savvy advisors. If everything goes as planned, everyone is happy. If it blows up, the seller has some protection on the downside.

That's what I was afraid it might mean. So that is NOT a good thing for me.

Any suggestions?

BTW, where are you in So CAL?

Karen

Hi Karen ...I am in San Diego. I don't look at that deal as a bad thing considering you have zero risk. The only thing you can do is make money on the back end. You won't lose any sleep being in that deal. You won't get a call that there was a grease fire in the kitchen, or a pipe burst and ruined the floors, or that the TB didn't tell you about the 6 cats they had. You'll get one of two calls...the TB aren't exercising the option or closing is in 30 days, where do you want the check sent.

I wouldn't agree to put half of your fee in escrow... that is why you're assigning the L/O back to the owner so that you have no 'interest' in the transaction once you get your option fee. Why would you need to have half of your fee held for 36 months??!!
You can still tell the seller that if the tenant buyer doesn't work out, that you can help her find another tenant buyer and just charge her a small fee (from the new option fee) for your expenses, and she can keep the rest of it...

Also, she will have all of your contact info for any concerns she may need answered in the future...

Valerie

Half of something is better than all of nothing. Especially with zero risk. you could offer to defer one third.