Advice on Feasibility of a Lease-to-Own Agreement for Real Estate Investment

Question

Hello, 
 
I need advice on a potential lease-to-own arrangement. I invested in a person who can’t pay me back. He owns several properties but has low equity (around 25%). I’m considering renting the properties from him, making the mortgage payments directly to the bank, and taking ownership once the loans are paid off. 
 
Here are my main concerns: 
 
Is this legally possible? What risks should I be aware of? How can I protect against defaults or liens by the current owner? What’s the process for transferring ownership? 
 
Thank you.

James L. Arrasmith · Answer

Here's an overview of the key considerations for your proposed lease-to-own arrangement: 
 
Legal feasibility: 
This type of arrangement is generally legally possible in California, but would need to be carefully structured. You'd likely use a combination of a lease agreement and an option to purchase or right of first refusal. 
 
Key risks to consider: 
1. Owner defaulting on other debts, leading to liens or foreclosure 
2. Property value changes affecting your investment 
3. Maintenance/repair costs during the lease period 
4. Changes in tax laws or interest rates 
5. Owner attempting to sell to another party 
 
Protecting against defaults/liens: 
1. Conduct thorough title searches and obtain title insurance 
2. Include clauses in the agreement prohibiting additional borrowing against the property 
3. Consider recording a memorandum of your agreement to provide notice to third parties 
4. Make payments directly to lenders/taxing authorities when possible 
 
Ownership transfer process: 
1. Execute a detailed lease-to-own agreement 
2. Record a memorandum of the agreement 
3. Make payments as agreed 
4. Exercise your option to purchase when conditions are met 
5. Close the sale like a standard real estate transaction 
 
Additional considerations: 
- Have an attorney draft/review all agreements 
- Get professional appraisals of the properties 
- Consider the tax implications for both parties 
- Ensure clear terms for maintenance responsibilities, insurance, etc. 
- Include provisions for early payoff or termination of the agreement 
 
This is a complex arrangement with significant legal and financial implications. I strongly recommend consulting with a real estate attorney and tax professional to fully evaluate the risks and structure the deal appropriately for your situation.

Delaram Keshvarian · Answer

Thank you for your question! 
 
You need an attorney to draft a lease agreement for you to protect your rights. If you are paying directly to the bank, you do not have to worry about the landlord's defaults.  
 
You need to record the lease in the country recorder to protect your property in the lease. Also, in the lease agreement, you include a provision that your consent is required if the landlord wants to encumber the property, or similar provisions to this.  
 
The terms of the trust control who is in charge of the assets. If your relatives are also trustees, they have breached their fiduciary duties to you. You may be able to discharge them and replace them with other trustees.

Q: Advice on Feasibility of a Lease-to-Own Agreement for Real Estate Investment