Owners have options in lease-to-own deals

Owners have options in lease-to-own deals Q:We have a home completely paid for and in excellent condition. We have a couple who want to lease it with an option to buy. How do you come up with a price for the house a year in the future? Also, once a lease with option contract is signed, can there be a loan made against the house during the lease, if an emergency comes along the way? -- Ginger

Answer: There are two ways to approach this.

First, you can sign a lease and give your tenants a "right of first refusal."

This means that when the tenants tell you they want to buy, you put the property on the market, try to find a buyer, and then the tenants have the right to match that other offer.

The other option is to sign a lease with an "option to purchase."

In this scenario, you set a price in advance. In today's market, no one can predict what homes will be selling for a year or two from now.

So I would just add 3 percent to 5 percent to the current appraised value of your house and use that number.

However, it is really academic since this is only an option to purchase. That means that your buyers do not have to exercise the option.

My suggestion: Use the option to purchase, but when the time comes for the buyers to decide whether they want to pay your price, explain that the price is negotiable and that you are willing to accept any reasonable offers.

Q:One of our family members would like to buy a home and, from our point of view, 2009 should be a very good year to do so. We would like to help him by fronting the money for a down payment. We got such a loan twice from a Realtor; he called it a holdback. We know that money can cause families to break up and would like to know exactly what kind of contract is needed to be responsible to ourselves and him in this matter. -- Terrance

Answer: You are absolutely correct. The old adage "money is the root of all evil" is especially true when families are involved.

You have to decide whether the money you lend will be secured or unsecured.

To secure the loan, the borrowers will have to sign a promissory note and a deed of trust (the mortgage document), and that trust deed must be recorded in the land records where the property is located. Because the prime lender wants security, its mortgage will be first and yours will be a second deed of trust.

If there is no deed of trust, your money is unsecured -- and there is a greater risk that you may never get it back.

However, the family member must confirm with his lender that he will allow another trust on the property.

I do not know what kind of transaction you entered into with your real estate agents, and I hope there was full disclosure to your lenders.

Otherwise, the holdback could be considered what is known as a silent second, which is illegal. Many private lenders have gone to jail in the past because they lent money to a homebuyer to assist in the purchase but did not advise the prime lender of this fact.

From your facts, it appears that your family member is in a different state than where you live.

I suggest you contact a local attorney in the state where the property will be located, and have that lawyer assist you in the preparation of all paperwork, including the promissory note and the trust deed (assuming that's the route you want to take).

Q:Our home is in the process of foreclosure. What happens if a house is foreclosed by the bank? What are our responsibilities? Do we have to make up the difference in what is owed on the house? -- Louisa

Answer: I have been receiving many questions as to whether a homeowner who has been foreclosed upon has to pay any deficiency between what the house sells for and the then-outstanding balance.

Each state has different laws; some completely disallow a lender from going after the homeowners who lost their house, while other states allow some form of deficiency. You will have to talk with an attorney in your state for this answer.

At a foreclosure sale, there are two possible buyers. One is a third party who is the successful bidder. The other -- which apparently is the norm now in today's difficult financial market -- is the bank itself.

Either way, you will have to move out of the house.

I would recommend that you personally attend the foreclosure sale (no matter how traumatic this may be) to determine who will own your house. You may be able to negotiate a rental for a period of time, so that you can at least stay in the house for a little longer.

Before the foreclosure sale, have you exhausted all available options?

Does your state have any laws or programs that can assist you? Have you talked with a real estate agent about arranging for a short sale?

Or have you discussed giving the property back to the lender so as to avoid the foreclosure sale; this is known as a deed in lieu of foreclosure.

Q:My parents' house is paid off. The house is in my father's name only; my mother has his power of attorney (and I have hers). My father's last will and testament leaves everything to my mother. Is there any reason to get my mother's name added to the deed? If so, what are the legal steps one should follow to get it done? If it is done, I assume it should be joint tenants with rights of survivorship? -- C.H.

Answer: Normally, I don't recommend putting children on title with the parents, as there can be taxable consequences. In your situation, however, I think your suggestion makes sense.

While we don't like to think about death, it is inevitable. When both of your parents die, whoever inherits the house will get what is known as the stepped-up basis. That means for tax purposes, the value of the house on the date of death becomes the new tax basis of the property.

Currently, when your dad passes, you will have to probate his last will and testament. However, if your mother is added to title as joint tenants with right of survivorship, she will automatically own the house at that time, and probate will not be necessary.

Your mother also should have a will. In fact, in addition to a will, all of you should have a general durable power of attorney, a durable power of attorney for health, and a living will.

Just make sure that your father is mentally competent at this time to prepare all those documents.

Benny L. Kass is a practicing attorney in Washington. Questions for this column can be submitted to .