For those who do Land Contracts/AFD, etc. - Posted by Charity

Real Estate Investing
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Posted by Jim FL on August 03, 2001 at 23:37:52:

Charity,
I would say that this course you have is wrong, unless in the context they are referring to a VA loan.
With VA loans, it is my understanding that a contract for deed, or Land Contract is exempted from their DOS clause.
Take a look at the GSG act, and you as well as a DOS clause in your own mortgage, and you will see that the things I mentioned in the above post do in fact violate the DOS clause.
However, I would not let this stop me from doing deals.
We just had a long thread here recently about the DOS clause, because it was rumored that a large national lender was calling loans.
It turns out that the lender did in fact call some loans, but only AFTER someone told them about the transfer.
So, if done right, the DOS clause should be a non-issue.

If I had more time, I’d go into the other issues you asked about, but I’m a bit busy at the moment.
Take care,
Jim FL

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For those who do Land Contracts/AFD, etc. - Posted by Charity

Posted by Charity on August 03, 2001 at 23:24:29:

I am trying to understand the difference between Land Contracts and Subject To. I know with one the seller keeps the deed and not with the other. What are the benefits to the seller and to the investor in each scenario. For example, if subject to activates the DOC clause and an LC does not, why is it better for the investor to do subject to (other than we get the deed earlier). Also, why do LOs instead of Land Contracts? I guess I am trying to understand in what cases you all do a LC instead of another avenue. Also, how do you explain an LC to a seller?

Thanks!
CHarity

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Difference Between LC and LO - Posted by Sean

Posted by Sean on August 04, 2001 at 07:14:06:

Both a land contract and a lease-option are similar in that they are both installment sales where you get equitable title and not legal title to the property. Both have many of the same pitfalls in terms of Seller ability to perform.

The difference is that a land contract is much more straightforward. It will probably announce right on the face of it the purchase price and the interest rate. Usually with a land contract the Buyer will take credit on his 1040 for interest paid on a mortgage (tax deductible) while on a lease-option the Seller will retain the tax benefits of the property.

A lease-option will claim to have a certain purchase price, but really that number is more like the balloon payment due out in a few years. It won’t mention an interest rate at all instead that will be concealed in a credit amount gained per “rent payment.”

A lease-option is usually used over a land contract by a sophisticated Buyer because a Seller may be agreeing to a very low price or low interest rate without even realizing it.

Example: You find a property worth $100,000 offered for sale. You offer $110,000 on a lease-option and agree to take over all maintenance on the property. You will pay $800 a month in “rent” and receive a $600 credit. The term of the lease-option is for three years. You give $2,000 option consideration. The taxes on the property are $85/month and insurance is $40/month.

How is this any different from a land contract where you buy for $100,000 (the fair market value) putting $2,000 down and paying $800 a month in PITI at 5.14% interest rate and a balloon payment due in three years of $88,400?

To my way of thinking there is no real difference, except that a Seller is likely to balk at providing you financing under a land contract where it clearly states the 5.14% interest rate but may happily accept a lease option for precisely the same terms.

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A little help here - Posted by JT - IN

Posted by JT - IN on August 04, 2001 at 24:10:59:

Charity:

The interest and motivation in maintaining conrol of the deed, is usually opposite one another, from Buyer to Seller, so depending upon which position you are in, either Buyer or Seller, determines what you should ask for. Let me explain.

The best position to be in, regarding marketable or equitable interest in RE ownership, is to have the deed. So, if you are the Buyer, you want to first ask for the Deed. Now most sellers don’t want to give up the deed, unless extremely motivated (don’t wanters), so they are reluctant to give up the deed, etc.

As the Buyer, this is the order to ask for the title to RE, in most cases, but htis is generality, and can vary depending upon several circumstances.

  1. Subject to - Get the Deed, 2) Land Contract, 3) L/O

As the Seller, just reverse the order in which you are willing to sell the property, which will maintain the most control over the property for you.

Again, exact circumstances of indebtedness on the proeprty will modify the application of the above.

Just the way that I view things…

JT - IN

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Re: For those who do Land Contracts/AFD, etc. - Posted by Tom – IN

Posted by Tom – IN on August 04, 2001 at 24:07:55:

Let me take a stab at some of your questions.
CFD, or contract sale, or land contract, or whichever name is popular in your area, are all essentially the same. The seller keeps the deed in his hot little hand and the buyer makes payments, very similar to a mortgage, as far as the accounting. Disadvantage to seller, if buyer defaults, he has to go through foreclosure. Although frequently the seller can buy the buyer out for a modest sum. Disadvantage to buyer, the seller has the deed, and hopefully can get the deed when the sale is paid off. Also, buyer needs to be aware he should have some way of knowing that the seller is actually paying off HIS mortgage or whatever on the sale. If you are the buyer, good to try to get the seller to put the deed into escrow, perhaps with a real estate attorney. Many buyers and sellers are familar with the contract sale.

Subject To. Only you, as an investor probably understand this one. The buyer is never going to hear about it. You’ve got to explain it to the seller, and sell him on your integrity, to make it work. Basically, the seller deeds the property into a trust that you control, and gives you his payment book. So, you get the deed up front. Now the seller has a tough time getting the deed back from you if you default. You need to be extremely reluctant to use Sub2 anytime the sales and/or rental market is slow in your area. How long can you make the payments on an empty house?

Actually, to a seller, a Lease option is very much like a lease on a car from a car dealer, with an option to buy at the end. The big advantage to you, the investor, to acquiring a house on a lease option is that you can control the sale for some time without actually buying the house. If you can’t find a qualified buyer, then you don’t buy the house.
Keep in mind when you ask these questions that from your viewpoint, there is a big difference between the first transaction, between the seller and you the investor, and the second transaction, between you the investor and the buyer. You need to preface each of your questions with something like “When I am buying a house from a sellor”, or “When I am selling a house to a buyer or tenant/buyer”…

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Re: For those who do Land Contracts/AFD, etc. - Posted by Jim FL

Posted by Jim FL on August 03, 2001 at 23:26:09:

Charity,
A L/O, Land Contract and “Subject to” are all violations of the Due On Sale clause.
Just a little FYI.
Take care,
Jim FL

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I am confused then… - Posted by Charity

Posted by Charity on August 03, 2001 at 23:32:28:

I have a very thorough course from an Atlanta investor that states “This arrangement protects the Sellers from a demand to be paid using the Due On Sale clause in the mortgage.” I took that to mean that in AFD it didn’t violate it for some reason. This course was written by a very prominent investor here who has many other really good courses. Am I misreading what he is saying or is his quote just wrong?

Thanks!
Charity

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The Protection is Provided… - Posted by ScottS

Posted by ScottS on August 04, 2001 at 13:36:09:

in the fact that the transaction is very hard to detect.

While IF it was detected, there is a danger of the lender “at it’s option” calling the loan due. But since you don’t record any deed or any dead givaway, the lenders can’t find out unless someone tells.

That’s where the protection is provided. I would doubt any experienced investor would think these arrangements walk all over the DOSC.

ScottS