Posted by Rick Wheat on March 15, 2000 at 09:20:41:
Sean:
A Lease/Option is usually not as attractive to a Tenant/Buyer than a wrap-around mortgage. You’re right, the payments made by the T/B are deductible, and an ownership interest is almost always more attractive than simply leasing with the opportunity to buy at a later date.
One of the only times that might be the case, is when the T/B has just moved into the area, and wants an opportunity to check out a neighborhood before absolutely committing to purchase in it.
On the other hand, a Lease/Option is quite frequently better for YOU, the Seller. With some states, a judicial foreclosure is necessary to regain posession of a property sold and having a mortgage retained. However, with a Lease/Option, it may be as simple as an eviction (which usually takes quite a bit less time).
The reasons I do many more owner financed sales than Lease/Options are these: a) People will pay more to BUY a house (purchase price) with “no qualifying owner financing” that you can offer with a wrap-around; b) the downpayment is usually more for a wrap, because people sometimes have an aversion to putting up large sums of non-refundable money just to rent with an opportunity to close; c) the monthly payments are usually more, since they are tax-deductable and the after-tax implications are better for the buyer than they are for renters; d) the property can usually be sold faster, because “no qualifying financing” attracts buyers like moths to a flame.
Whichever way you choose, the point is to Just Do It! (Sorry Michael J.)
I have no actual deal in mind, but I’m wondering what the advantages are of doing a lease option versus a wrap-around mortgage, aka all-inclusive trust deed here in California.
From the buyer’s perspective, both would generally require about the same monthly payment, and both can be done with low money down. However, the buyer would receive the tax benefits on an outright purchase of the property.
Same from the seller’s perspective, although it would be easier to evict a defaulting tenant rather than foreclose. The seller would certainly structure either deal to at least cover the underlying mortgage.
When is a lease option better than a wrap or vice versa from a seller’s and a buyer’s perspective?
Posted by David(Ca) on March 15, 2000 at 09:29:12:
Sean:
I think you pretty much said it all, the main points are:
You can get a little more down and monthly with a wrap, but you lose the tax benefits.
You have to foreclose with a wrap, evict with a L/O.
Although both violate DOS, somehow a L/O seems like less of a problem, especially if the lease is for less than 3 years.
It may depend more on your personal tax situation than anything else, maybe you don’t want to take the profits from a sale this year, maybe you want to carry it another year or two to qualify for a 1031, or to avoid dealer status.
If the underlying loan is in your name, there is a limit FNMA will allow, then you have to start with a more expensive portfolio lender.
A wrap mortgage(AITD) is typically recorded. When that is done on a loan with a DOS clause you are are public notice that title has transferred. Combine that with a change of the insurance policy and you wave a red flag in the face of the bull(lender).
A unrecorded contract for deed, land trusts and Pac trusts can for tax purposes be a transfer and allow them the tax deduction. In turn I could do a L/O. Since the standard deduction is 7200 then the first 600 of interest doesn’t do them much good. I could give them a credit for the first year or two to “compensate” them for loss of a deduction.
A wrap either via deed or contract is more for longer term cash flow while a lease option is for shorter term where they will cash you out. Your desire for cash flow versus cash and the form of the purchase is more of the guide. I can do a subject to deal where the former owner wants some cash at a future time. Unless the T/B refi’s there is not the cash to pay it. But give me an assumable loan or a subject to where I am in for very little and I may very well wrap(or by contract) the existing financing. That is if there is not a big cash payday that I would want to cash out with.