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Avoiding The "Equitable Interest"

"I Have An Equitable Interest In The Property"...

Tenant/buyers who default on a lease/option do not always go away quietly. Sometimes, they fight the eviction and go into court kicking and screaming, "I HAVE AN EQUITABLE INTEREST IN THE PROPERTY." 

What they are arguing is that the lease/option is not a landlord/tenant relationship, but rather a seller/buyer relationship. If the Judge agrees, your lease/option is "re-characterized" as an installment land contract. This may require you to foreclose the tenant, not just evict him.

Here are some tips for avoiding the equitable interest problem:

  • Use Separate Agreements. 
    Give your tenant a lease and a separate option agreement. Make certain the lease does not refer to the option. 

  • Keep Your Term Short
    Do not give your tenant buyer more than one year lease/options at a time. If the tenant insists on more than one year, give him a one year with a right to renew. Draw up a brand new lease and option agreement each time he renews. Raise the purchase price each time the tenant buyer renews.

  • Take a Security Deposit. 
    Sellers don't take security deposits
    , landlords do. Make it look like a landlord/tenant relationship, even if the security deposit is small.

  • Pay the Taxes and Insurance
    Do not let the tenant pay the taxes and insurance. This makes it look like a sale.

  • Watch Your Language
    Refrain from using the words "credit," "seller" and "buyer" in your lease agreement. Instead, use the words "non-refundable option," "landlord" and "tenant."




Gar C. May, Realtor®
1357 Hornblend Street
San Diego, Ca 92109
cadre # 479003
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