If you are buying on a lease option, how do you protect yourself from the buyer backing out of the deal down the road? There are three ways for you to lock in your position:
1. Record a “Memorandum of Option.”
Or, if you're lazy, record your option itself down at the county recorders/land records office. This will put a cloud on the title, which makes it hard for the seller to sell or refinance. Notice I said “hard,” not impossible. You still need to take steps two and three below.
I have been guilty on deals of skipping steps two and three. It only cost me approximately $500,000! But you do what you want. As for me, I will always do steps two and three now.
2. Record a “Performance Mortgage/Performance Deed of Trust” Against the Property.
A mortgage/deed of trust is a security instrument that obligates one party on another agreement (usually a promissory note to a bank) or if second party defaults, first party gets to foreclose on the property. You can use a modified version of this form to secure your option. We've been doing this for years and it's worked well.
While it's a gray zone whether or not you'll be able to foreclose on the seller should they not perform (different attorneys and judges in different states tell me different things), it is a great idea to do because it is a much stronger way to lock in your option.
3. Escrow All the Closing Documents Up Front for the Eventual Closing.
This means, the seller signs the Purchase Contract, the deed, the escrow/closing agent instructions, etc. We use fresh documents at closing if possible, but I would rather be on title with stale documents and have to clear up some title problems than to have it be the other way around.