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Sunday, August 9, 1992 - Page updated at 12:00 AM

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Bob Bruss

Avoid Lease-Option Scam By Checking Mortgage Payments

Q I know you are a big advocate of lease-options to sell homes. I agree they can work very well to sell homes and to get prospective buyers into homes. However, I work with a major S&L and my responsibility is dealing with foreclosures. Recently, I have noticed a considerable number of our foreclosures involve dishonest owners who lease-optioned their houses to tenants, took large option payments, never made any more mortgage payments, and then skipped town with the option and rent payments.

After we foreclose, I have the unpleasant task of confronting the occupants with the bad news their home has been foreclosed and they have been swindled by the defaulting borrower. It would be a great public service if you could warn prospective lease-option tenants to be sure to check that their landlord is keeping up the mortgage payments and will be able to deliver marketable title when the tenant is ready to exercise the purchase option.

A: Thank you for explaining a lease-option scam of which I was not aware. Of course, in the situation which you describe the tenant has legal recourse for damages against the defaulting owner, but by then he or she has probably left town or filed bankruptcy to avoid liability.

As you may know, I like to buy and sell houses on lease-options. As a lease-option buyer, I insist on paying the mortgage payments and property taxes directly so I know they are always current. The simple solution to the serious problem you describe is for the lease-option tenant to give the landlord a check each month payable to the mortgage lender and a check to the landlord for the balance of the rent. Only a dishonest landlord would object to such an arrangement.

Despite the problem you explain, most lease-options home sales work out very successfully. Lease-options enable a seller to sell virtually any home, even in a slow buyer's market, and they enable buyers to buy a home they cannot yet afford to purchase.

For example, just a few weeks ago one of my lease-option tenants bought their home. For two years they paid $1,500 per month rent with a $500 per month rent credit toward their down payment. In addition, they paid $3,500 non-refundable option money when they moved in. As a result, they had $15,500 for their down payment after 24 months. The S&L lender gave them an 80 percent first mortgage and I carried back a second mortgage for the balance. Without a lease-option, these residents would not be able to afford to buy their home as they had good income, but no down payment savings.

In other words, a lease-option is like a forced savings account for the prospective home buyer. It also works, when structured correctly, to immediately sell virtually any home.

P.S. After my residents above bought their home their monthly mortgage payment was less than they had been paying me for rent. Everyone wins with lease-options.

Q: Last Sunday, my wife and I went to a realtor's open house. It was run down and in need of a paint job. The agent gave us an information sheet which gave the details about the house. It said the house is being sold "as is." When I asked the agent what that means, she said the seller doesn't want to pay for any repairs. I can understand that, but I wonder if there are more implications?

A: When a property is sold "as is" that means the seller and real estate agent do not warrant the property. In other words, they will not be responsible for any repairs. So "buyer beware."

However, the seller has a duty to disclose to the buyer any known defects, such as a leaky roof, so the buyer knows the condition of the property. But if the buyer discovers a defect which the seller was not aware of, the seller has no duty to make repairs. For further details please consult your attorney.

Q: We just listed our home for sale. It is located in a very exclusive neighborhood. The realtor asked our permission to put a lock box on our front door, so if we are not home when a realty agent wants to show our home to prospects the agent can get easily the key. However, I want to be home when prospects inspect our home. My wife thinks we should allow a lock box. What do you think?

Q: Listen to your smart wife. Real estate agents often do not have adequate time to phone you for an appointment to show your home. For example, when I was looking for homes to buy, I expressed various objections to the homes the agent showed me. Then she said, "I have the perfect home for you." It wasn't among the homes she planned to show me. But it met my needs perfectly and I bought it after she used the lock box to get the key to show me the home.

Please give your real estate agent every cooperation to get your home sold, such as putting a lock box on the front door, so all local real estate agents can easily show your home if you are not home. Incidentally, even if you are home when an agent phones for an appointment, be sure to get out of the house before the agent arrives. Agents will do a much better job of selling your home than you can.

Q: I am "over 70" and own my house in my name. It has a high interest rate mortgage which I now want to refinance. However, the mortgage lender insists my second husband, whom I married a few years ago, co-sign and be on the title, so I can qualify for the refinanced mortgage.

But I am uncertain as to the best way to hold title. Both of us have children from our first marriages. Should we hold title as joint tenants, tenants in common, or some other way? Also, before my husband married me he sold his home and used the $125,000 "over 55 rule" home sale tax exemption. Friends have told me that means I cannot use this $125,000 exemption when I sell my home. Is this true?

A: You asked two very challenging questions which should interest all senior citizens. If, to qualify for refinancing your mortgage, you add your husband as a joint tenant with right of survivorship, that means when one of you dies the survivor receives full title to the house. For example, if you die first then your husband owns the house and your children will not receive it. I doubt that is what you want.

If you instead decide to hold title as tenants in common, when you or your husband dies, the deceased's share becomes subject to that person's will. I presume your will leaves your assets to your children and his will leaves his assets to his children. The result could be when one of you dies, the survivor becomes a co-owner with the children of the deceased spouse. Is this what you want? I doubt it.

A better alternative is to put the title to your house into a living trust. During the lifetimes of you and your husband you continue to deal with the house, and any other major assets you put into the living trust, in the normal way. You can buy, sell, refinance, or do virtually anything with the living trust assets because you and your husband are the co-trustees and co-beneficiaries.

If one of you becomes disabled and unable to manage your affairs, the other co-trustee takes over. But when one of you dies, the trust assets automatically pass without probate costs and delays in accordance with the terms of the living trust. For example, you can provide that if you die first your husband can live in the house as long as he wants, but when he dies or moves out the title goes to your children (since it was your house before the marriage) without probate. Please consult a local attorney experienced with living trusts for more information.

As for your question about the $125,000 "over 55 rule" home sale tax exemption if you decide to sell, I have some bad news for you. Since your husband previously used his once-per-lifetime exemption before you married him, you acquired a "tainted spouse" and are now unable to use the $125,000 exemption you could have used before the marriage. Your tax adviser can give you further details.

(Copyright 1992, Tribune Media Services Inc.) Bob Bruss' column appears Sundays in the Home/Real Estate section of The Times. Letters and comments should be sent to Bob Bruss, Seattle Times Newsroom, P.O. Box 70, Seattle, WA 98111.

Copyright (c) 1992 Seattle Times Company, All Rights Reserved.

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