What can I do to protect myself from the seller defaulting when I have a lease option on a property?

Asked by Connie, Costa Mesa, CA Tue Mar 18, 2008

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Patti Philli…, , Carlsbad, CA
Wed Mar 19, 2008
Connie, In this economy you are very prudent to be conerned about the owner defaulting on the property you are buying. I had a tragic phone call a few months ago from someone who had put down $18K and had made large monthly payments in excess of the seller's monthly mortgage, only to find that they were served papers on an impending auction on the property. All 9 months that they had been paying the seller WASN'T!!! Imagine.

My suggestion is that everything be spelled out very clearly in your initial agreement, just as Dot said. I would have a Realtor or attorney protect you in this. Have an escrow opened, with the deposit and any monthly amount that is targeted toward the purchase to go into the escrow account. Not only will you know that your money is protected, it will also help you when you are ready to complete the purchase. It will show the lender your track record of making payments.

In addition, I would suggest that you formulate (and contracturally document) that you have a proof of payment to the mortgage lender each month- whether the seller faxes you confirmation of receipt of payment, allows you to view the lender's payment website, or whatever- you need to know that the monthly payments (and taxes) are current.

Lastly, if you are going to be making improvements to the property during the lease option time period I would protect yourself there somehow also, in your contract.

Last, some lease options file a lien against the deed for the amount of the deposit, until the lease option is excersized. This is a bit more difficult to get the seller to agree to, because if you were to default on your portion, they have the lien, so they may not go for it.

Protect yourself- and the seller, in every step of the transaction!

Patti Phillips
2 votes
Harrison K.…, Agent, Irvine, CA
Fri Nov 7, 2008
Interesting Question about protecting yourself as lessee on property and possible seller defaulting on his loan.

In California and if you have a written lease, and if it is a recordable document clearly showing legal description of the property, you can file a Lis Pendes with the county recorder. You can also file and Request for Notice involving this property and ask that the recorder notify you of official other recordings during time of the lease.

Please hire a qualified Realtor agent for your situation involving this lease.

Harrison K. Long
Realtor & broker
Explore Group Properties, Coldwell Banker Previews
Irvine, California
http://www.BuyersExploreHomes.com (The Best Web Site For Property Searching)
0 votes
Dot Chance, Agent, Burbank, CA
Wed Mar 19, 2008
Patti is right in that you should require proof that payments are being made...we required this periodically. When the tax assessor started sending obviously past due tax bills we called our Realtor and she took care of getting the seller to pay the bill!

It is also true that we are in a declining market - in a lease option there is always one side that loses out...
Web Reference:  http://www.DotChance.com
0 votes
Sandra Carli…, Agent, Newport Beach, CA
Wed Mar 19, 2008
Patti is absolutely right on this one. I have also seen people pay every month only to find out the sellers never made their payments.

I would also hesitate to enter into this type of contract in certain areas where the prices are really declining. You don't want your deposit at risk if you choose not to go through with the purchase at your current agreed upon price down the road.
Web Reference:  http://www.OCBeachBlog.com
0 votes
Dot Chance, Agent, Burbank, CA
Tue Mar 18, 2008
Hi, Connie. Make sure all your paperwork is in order. Read every word of it. Make sure you do not make any late payments.

We bought our house through a lease option and the house had appreciated quite a bit. The seller was remorseful and tried everything he could to stop us from closing on the house. He even lied and said we had made late payments...we had every receipt and cancelled check. We had to hire an attorney to make him back off and go through with the sale.
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