What Happens If The Lease Option Seller Stops Making Their Mortgage Payments?

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“I helped a family set up a lease to own. We found a buyer and made $4,000 within two months. The buyer then did not make the payments on the property. What is the best advice or action to take to assist this homeowner, the lease option buyer?” – Tammy Green

Joe: First of all, if you ever have the feeling going into the deal that your seller is unstable, that they might be filing bankruptcy or that they cant make the payments or that there’s going to be a big problem (which is only a small percentage of most of the sellers that we deal with – most of them can make their payments and the reason they’re doing lease options is because they don’t want to go into bankruptcy and don’t want to damage their credit or go into foreclosure, so that going to be fairly rare) – if you find somebody that you think is unstable, you can set up an escrow payment to have the monthly payment go through a title company for a small monthly fee and have it administrated by that attorney at the title company.
 
Joe: Or, you can give access to the online loan account of the buyer so they can see that the payment is being made every month, and if they see one month that its not being made, they can switch things out – you can even change the verbiage in the contract to make it possible for that buyer to pay the mortgage amount directly to the bank.
 
Joe: So let’s say you have a lease option fee of $1,000 a month and $750 of that has to be paid toward the mortgage every month. We could have the buyer set it up so that he pays $750 directly to the bank and the other $250 directly to the seller, so your responsibility through this process is to pay attention to this situation and make sure that people aren’t going to do this to the buyer you’re dealing with; you want to make sure that your sellers are stable.
 
Joe: The person who is most at risk in the transaction most of the time is the seller, and that’s why you make the seller responsible for making the payments to the mortgage; they’re going to be more responsible to do that. And it’s also easier to get rid of a lease option buyer than it is to deal with a situation like this.
 
Joe: If you’re in a situation like this where you didn’t foresee any of this stuff and suddenly it starts to happen and the seller’s not making their payments and you manage to catch it in time, then it’s possible for that buyer to start making the payments directly to the bank, so there’s no foreclosure. They may be late every month, but they can make that portion of the payment directly to the bank and pay the balance of it to the seller.
 
Joe: They can also bring it current when the property is purchased, because there’s probably a spread between the mortgage amount and the sale price, so if they do exercise the option, they’ll still be okay.
 
Joe: If six months go by and suddenly they’re getting a notice of default in the mail and they’re looking at it and saying, ‘Okay, this is bad and we need to get out of this property,’ a lot of times that buyer will want to leave that property and then you can help them find another property and give them a discount on the lease option fee. Don’t do it for free, but give them a discount on the lease option fee. Maybe you can go talk to the seller and say, ‘Hey, what’s going on here? Is there some way we can solve this problem?’ and there might be a way to solve the problem.
 
Joe: Just try to keep open communication between everybody. Make sure that the buyer and the seller know that this is not your problem. Don’t get angry with people – just try to solve their problem and see what you can do to smooth out the process.
 
Joe: If you ignore people, you’re going to make them mad and if you don’t do anything, you’re going to make them mad. If they get mad at you, then their potential for them to sue you goes way up, so what you want to try to do is keep them at least happy with you and then the likelihood that they’ll come after you is much, much less if they see that you’re doing the best that you can in a difficult situation. Alright, I hope that helps.