Posted by Brad S on September 14, 2000 at 10:00:22:
Thanks
Land Contract or Lease/Option, compare and contrast? - Posted by Brad S
Posted by Brad S on September 08, 2000 at 01:47:02:
I am trying to get more clear on the benefits and negatives while comparing a Land Contract sale to a lease/purchase. I think I have a pretty good idea of how they work but I would like to understand more clearly which situations are better suited for which plan of action.
thank you for your comments
Re: Land Contract or Lease/Option, compare and contrast? - Posted by chris
Posted by chris on September 10, 2000 at 08:21:14:
Brad-
If you’re considering those two methods, how about looking into a PACTrust?
-Chris
Re: Land Contract or Lease/Option, compare and contrast? - Posted by Lori Samson
Posted by Lori Samson on September 09, 2000 at 09:37:29:
The function of the two are so similar but contractually they are very different.
I would sell a house on a land contract but of course I would not recommend buying a house on one. The loop holes you can fall into are too great. I do recommend selling because of the benefits to you as the seller.
The lease option has the same feel to the buyer as a land contract because they put a 3-5% downand make monthly payments. The land contract you can get a much higher down then a lease option, but with a lease option you can get them out much quickerin the event of default. If they default on their lease you can quickly evict. You have to forclose in some states on a land contract. You will receive monthly payments from your buyer and you will keep the underlying mortgage intact on both types of transactions.
I feel the lease option gives you as the investor, the most controll to bring action in the event of a default. I got nailed last year on giving a notice a few days earier then I should have on a land contract and the couple lived there for 8 months for free while we battled it out between attorneys. I just like the controll you have with the lease option and the buyer understands that they put some money down and they make monthly payments and they will call it theirs. If they want the house badly enough they don’t care what you call it (land contract or lease option) they just want a chance at home ownership.
We as investors just want a chance at the profits $$$$$$$$!!
Lori
Re: Land Contract or Lease/Option, compare and contrast? - Posted by Brad S
Posted by Brad S on September 10, 2000 at 22:40:46:
Chris,
I thought a PACTrust was more for buying a property “subject to” an existing loan. I am trying to keep as much control of the property as I can. I want to make sure the mortgage, taxes and insurance is getting paid since I will still be responsible for the loan.
How were you thinking I could use a PACTrust? I am interested in knowing.
–Brad
Re: Land Contract or Lease/Option, compare and contrast? - Posted by ScottE
Posted by ScottE on September 10, 2000 at 11:23:14:
Lori,
You mentioned that you “would not recommend buying a house” on a land contract because there are too many “loop holes”. What are the loopholes?
Thanks
Scott
Re: Land Contract or Lease/Option, compare and contrast? - Posted by JohnBoy
Posted by JohnBoy on September 10, 2000 at 11:07:23:
How did giving a notice a few days early result in the buyer being able to stay in the property for 8 months without paying? Regardless, if they didn’t pay when the payment was due, why couldn’t you have sent a notice again and foreclose once they defaulted? I thought it only took 21 days to foreclose in Texas? How does making a minor mistake in serving a notice a few days early result in 8 months of free payments?
Wouldn’t that be the same if a mortgage company made a mistake on your loan? Like they haven’t received a payment yet when they did? Or they sent notice they didn’t have insurance on your property when they did and even added insurance costs by placing insurance on the property when they shouldn’t have because you had it all along? What’s missing in this?
Re: Land Contract or Lease/Option, compare and contrast? - Posted by Brad S
Posted by Brad S on September 09, 2000 at 13:32:10:
Thanks for the reply Lori,
So, does it make sense to do what I am thinking.
To lease option to somebody for a couple of years then to sell to them on a land contract so I can create an ongoing, monthly cash flow?
The lease option will create an up-front option consideration and a monthly rent overage toward a down payment and then when the option is exercised, the Land Contract will create a monthly cash flow over my existing payments (assuming I am able to charge enough interest).
Afterall the lease option is meant mainly to provide the opportunity for someone to spread their downpayment over time. They still don’t get all the benefits of home ownership, tax deduction, appreciation etc. Or do they? What are the tax consequences of each method? Capital gains etc?
Does this plan make sense or is there another way that sounds better?
Any comments are appreciated
–Brad
Re: Land Contract or Lease/Option, compare and contrast? - Posted by chris
Posted by chris on September 11, 2000 at 02:50:25:
Hi Brad-
You would still be in control because the third-party trustee takes direction from you. The resident beneficiary( triple net lease tenant) sends rent payments to a bonded collection service (PAC Management) who disperses this money to pay your PITI as well as any other expenses you may have on the property. The tenant receives many benefits such as tax deductions under IRC 163(h)4(D). The trustee holds legal and equitable title. If the tenant doesn’t pay he is evicted.
Hopefully Bill Gatten will be along to cover this more eloquently.
-Good Luck,Chris
Re: Contract for deed pit I fell into… - Posted by Lori Samson
Posted by Lori Samson on September 10, 2000 at 23:30:09:
ffecting What happened was the buyers never made a payment on time so every(and I mean every)month I sent a notice of default and intent to cancel. I got so use to doing that and then I actually cancelled their contract and filed eviction. I got to court and won and then the judge makes a very big point of telling them they can appeal it and they walked straight out of the courtroom and filed an appeal. They got an attorney and found out that they had paid in 10% principle and I should have gave them a 30 day notice to cure and I only gave them 18 days. I knew about the 10% principle but I was so use to pulling up the notice each month and just changing the dates that it never occurred to me. Then the attorney’s got into the middle and they would make an offer and we would counter and we would make an offer and they would counter… and on it went for 8 months until I paid them to get the *&^&%$ out of the house!! I lost 14k in lost payments and attorney fees! I avoid the attorney scene at all cost now! If I have a conflict with someone I am likely to move on and lick my wounds as I go! That was one stressful and costly summer!
Lori
Re: Land Contract or Lease/Option, compare and contrast? - Posted by JohnBoy
Posted by JohnBoy on September 10, 2000 at 10:58:01:
The lease option is NOT meant mainly to provide the opportunity for someone to spread their downpayment over time. The lease option has NOTHING to do with a down payment at all.
You can allow the tenant/buyer to pay additional money above their rent amount to be put towards a down payment if they wanted too. But since in most cases they will already be paying above market rent on the property, it’s unlikely they would have extra cash to pay every month towards a down payment. Besides, even if they had the extra cash to pay, why would they give it to the landlord each month instead of just putting that money in their own bank account until they exercse the option?
Don’t confuse rent credits with down payment money. Rent credits go towards reducing the purchase price, NOT the down payment. If you get into this with monies being put towards down payments, you may find yourself having to give money back if they decide not to exercise the option.
A lease option is mainly meant for what it is. A lease with an option to buy! You have a lease which gives you the right to occupy the property while paying rent, that’s it. You have an option that gives you the right to buy the property at a predetermined price and at a later date, that’s it. You pay option consideration for getting that right, period! If you decided for whatever reason that you didn’t want to exercise your right and buy the property by the time the option expire’s, that’s your right, but the option consideration is lost. That was paid as consideration for getting the option in the first place. It has NOTHING to do with a down payment.
In the event the tenant decided to exercise their option and had to obtain a new loan from a lender to buy the property, depending on the lender, they LENDER “might” allow the buyer to apply their option consideration as being part of, or all of their down payment towards the property. But that’s between the lender and the buyer. The lender may also just treat their loan as a refinance vs. a purchase the same way they would on a contract for deed. None of this has anything to do with you or the tenant/buyer as far as anything being a down payment.
Option consideration is just that, consideration paid for getting the right to buy at a later date.
Rent credits, if any, are credits applied towards the purchase price, not the down payment.
A lease option doesn’t require a down payment. You don’t make a down payment on a RENTAL. You pay rent. You pay security deposits. When an option is involved, you pay consideration to BUY the RIGHT to get the OPTION. Nothing is for or towards a down payment when it’s pertaining to a lease option.
Re: Why do both? - Posted by Lori Samson
Posted by Lori Samson on September 09, 2000 at 22:53:38:
If you’re already in a lease option then why not stay in that? You are getting a cash flow from the difference in rent and you got money down, so why change anything? Keep them in the lease option and allow them to renew it for the next 20 years if you want. It can function the same as the land contract but it’s faster to get them out if need be. They don’t get title while in the lease option or in a contract for deed. They have to satisfy a sales price with interest before they will get title and it’s the same with a lease option. You can amortize a lease option the same as a mortgage is. Most people are only going to use the creative finance methods for a few years at most before they default or refinance it to get the house into their name and lower their payments.
DOn’t make it hard on yourself. Keep it simple.
Lori
Re: Land Contract or Lease/Option, compare and contrast? - Posted by Bill Gatten
Posted by Bill Gatten on September 11, 2000 at 15:58:59:
Can’t improve on what Chris said. But just to add some info…
The nice thing about a 3rd party trustee, co-beneficiary land trust relationship is that you can have or relinquish all the control you want. You can give the resident beneficiary tax benefits and some or all of the appreciation, but keep the Power of Direction for yourself. You can give them the tax write off or keep it yourself; you can give them the equity build-up from principal reduction, or keep it.
When you reduce your transaction to a personal property transfer, most of the rigors and rigamarole of dealing with Real Property issues are by-passed.
The key is to get a trustee you can trust (your attorney or a bank and trust company…or us…if you wish) and give them the direction up front as to what is to be done with the property throughout its term, and how its to be disposed of or dealt with at termination.
Bill
Re: Contract for deed pit I fell into… - Posted by JohnBoy
Posted by JohnBoy on September 10, 2000 at 23:58:46:
Ok, I understand that, but what I don’t understand is why all the back and forth stuff. Couldn’t you have just told your attorney, “Look! These people are in default, serve them the proper notice NOW and lets move forward with getting them out!” Either they pay up what’s due NOW, or we foreclose, period! Why couldn’t you have just taken that route since foreclosure moves quick in Texas? Still confused??? LOL
Now I am confused! - Posted by Brad S
Posted by Brad S on September 14, 2000 at 24:00:06:
John,
I was just listening to Ron LeGrand’s Lease/option tapes and he specifically says that the rent credit and option deposit is toward the down payment.
I guess I am not clear on why the distinction. Is there a specific reason it should be considered toward the purchase price as opposed to the down payment?
Afterall, it is actual cash money paid and therefore, would make sense for a lender to see it as the tenant/buyer having a financial interest in the property.
But maybe there are tax or other legal issues that come into play here, which dictate what we call the credit or deposit?
I’d appreciate if you could clear this up for me.
Thank you,
—Brad
Thanks for the clarification John! - Posted by Brad S
Posted by Brad S on September 10, 2000 at 20:00:30:
OK, I understand it a little better now John, thanks.
Could you or someone help me understand how the purchase might be structured when they decide to exercise the option?
For example: Let’s say the sales price was $100,000 and they have paid a total of $5,000 toward the sales price, in the form of rent credits and option consideration. Would the deal look something like this:
Sales Price - $100,000
Down Payment - $10,000 or 10%
1st TD - $ $85,000
Credit for payment already received - $5,000
Example #2:
Sales Price - $100,000
Down Payment - $10,000 (made up of Credit for payment already received ($5,000 )+ $5,000 cash)
1st TD - $ $90,000
Do these look right? and what other ways might you structure it?
—Brad
Re: There was a lot more to it… - Posted by Lori Samson
Posted by Lori Samson on September 11, 2000 at 17:33:48:
…after the attorney got hold of my contract he punched holes in it everywhere he could. He tried to alledge that I hadn’t paid taxes and it was because there was 71.00 that had gotten missed somehow for the city taxes. I think since they were sent to the tenants house and not to me. Then there was the vague disclosure and a few other things that the other attorney found. It was just a ping-pong match back and forth between attorneys. Long story and I may even be forgetting a few things. Trust me I begged my attorney to resolve it as quickly as possible but it just keep dragging on and on! We would make an offer and they would turn it down… and so on… and so on!
Lori
Re: Now I am confused! - Posted by JohnBoy
Posted by JohnBoy on September 14, 2000 at 08:39:26:
I haven’t heard LeGrand’s tapes. But if you mention the term “down payment” in your lease or option agreement it could cause you problems later if the tenant decides not to, or for some reason can not, exercise their option.
If you do not exercise the option, then HOW can you be obligated to have money as a down payment when no down payment is needed if you’re not buying a property?
You lease option a property to me. Your contract states that any option consideration and/or rent credits would be applied to my down payment if I exercise my option. For whatever reason, I do not exercise my option. Since I’m not exercising my option, I want MY down payment money back that was paid by me. Since I’m not buying the property, how can I have to pay you a down payment towards something I’m not buying? I only had an OPTION to buy. I’m not exercising my option. So I want my down payment money you have returned to me!
If your contract states that any option consideration and/or rent credits are to be applied towards the purchase price if I exercise my option, then clearly I must exercise my option to get the credit. It’s NOT any money that was credited towards a down payment which would only be required to purchase a property. It’s only applied towards the purchase price. I MUST purchase the property in order to take advantage of the credits.
Here is a paragraph in Bronchick’s option agreement pertaining to how any option consideration and rent credits are applied:
- OPTIONEE has paid the sum of $_______________________ as non-refundable option consideration which will be applied toward the purchase price of the property IF, and ONLY IF, OPTIONEE exercises this OPTION to purchase. In the event OPTIONEE fails to exercise the OPTION or defaults under any terms of the attached lease, this OPTION will be void and all monies will be retained by OPTIONOR as liquidated damages and not as a penalty.
I don’t know how LeGrand’s contract is worded pertaining to how the option consideration or rent credits are to be applied, but I’ll put my money on Bronchick’s contract. He IS a real estate attorney.
You can go to his site and read a copy of his contracts on L/O’s.
Click on the lease/option contract that is for you as a Landlord/Seller when selling on L/O.
Re: Thanks for the clarification John! - Posted by JohnBoy
Posted by JohnBoy on September 11, 2000 at 24:26:49:
Lets say you find a house that either buy or L/O from the seller. The house is worth $90k. You buy or L/O from the seller for $85k.
Now you turn around and L/O the house to your tenant/buyer with an option price of $100k. They put up $5k as option consideration for getting that option to buy. (Don’t use the term down payment, use the term option consideration. They don’t put up a down payment. They only put up option consideration that is for getting the right to purchase the property at a predetermined price and later date.)
You rent to them for 12 months at which time their option would expire at the end of those 12 months. They decide they want to exercise the option.
Their option price is $100k. You agreed to apply the option consideration they paid towards the purchase “IF” they exercised the option.
They paid $5k as option consideration, so their balance due is $95k to buy the house “IF” they exercise the option.
At closing you would get the $95k from your tenant/buyer which $85k of that would go towards paying off your mortgage or your seller if you L/O’d from him. You would have $10k left over that would be your back end profit.
If you gave them any rent credit, that would also be applied towards the purchase price, “IF” they exercised their option to buy. If the rent credit was for $200 a month from the rent they paid you, they would have an additional $2400 towards the purchase price “IF” they exercise the option.
So that would give them $5k from option consideration + $2400 from rent credits for a total of $7400 towards the purchase price. $100k - $7400 = $92,600 due to purchase the house.
$92,600 - $85k (your option price or mortgage amount) = $7,600.00 as your back end profit “IF” they exercise the option and buy the property.
So you would have made $5k up front from the non-refundable option consideration, plus any spread on the rent your tenant/buyer paid you minus what your monthly rent or payment was, plus the $7,600.00 on the back end “IF” they exercised the option.
If they DON’T exercise the option, they lose the $5k as paid consideration for buying an option, and lose any rent credits towards the purchase price since they didn’t purchase the property. The ONLY way they could realize any rent credit and get additional value from the $5k option consideration is “IF” they go through with exercising the option and buy the property.
There is nothing between you and your tenant/buyer pertaining to a trust deed or mortgage. You ONLY have a LEASE for a rental agreement and a seperate OPTION agreement that gives them an option to buy. They get a trust deed or mortgage from their lender when they actually buy the property and get a loan.
Re: Here’s a sample of one I did this weekend - Posted by Lori Samson
Posted by Lori Samson on September 10, 2000 at 23:39:44:
I am paying 84,500 for the house. I am selling it a lease with option for 3500 down and 1150 a month.
The tenant buyer put down 3500 and I am giving no rent credit and at the end of the 12 months they will get a loan for the sales price of 92,900 and they get credit for having already put down 3500. They will now finance 89,400.
If I would have given a rent credit they would have gotten that credited also.
Lori