Posted by Brent_IL on March 25, 2002 at 16:59:15:
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Wrap, L/O, CFD…What’s the difference? - Posted by Jimmy G.
Posted by Jimmy G. on March 25, 2002 at 10:57:23:
Please forgive. I am very new to the RE game. I understand the theoretical differences between a wrap-around, a lease-option, and contract for deed. However, they all seem very similar in the “real world”. Can anyone explain how they really are different and what are the advantages of one versus another for the investor? For example, what scenario would I want to use a L/O as opposed to a CFD? How about a wrap -v- a L/O, etc.?
Any help in clearing this up would be much appreciated.
Re: Wrap, L/O, CFD…What’s the difference? - Posted by Brent_IL
Posted by Brent_IL on March 25, 2002 at 11:09:48:
A wrap buyer is the legal owner of the property.
A CFD buyer has an equitable interest in the property which is owned by the seller.
A L/Oer is a renter that has an option to buy the property.
Re: Wrap, L/O, CFD…What’s the difference? - Posted by Mike
Posted by Mike on March 25, 2002 at 11:45:46:
A wrap takes the additional equity plus the mortgage on the house and makes the new owner legally repsonsible for the payments. I don’t like buying with wraps for that reason i would rather get the deed and not have the legal responsibility to repay the debt but still control the asset.
A lease option I prefer to sell any property I can this way, because the optionee has very few rights as I dictate them all in the contract, and I still maintian control of the asset until they buy it from me.
Re: Wrap, L/O, CFD…What’s the difference? - Posted by Jack
Posted by Jack on March 25, 2002 at 11:25:50:
A couple of clarifications:
“A wrap buyer is the legal owner of the property.”
No, not always. A wrap can be via an All Inclusive Trust Deed (AITD), a wrap-around mortgage, or a CFD. The first two will give the buyer legal title, the CFD will not.
“A CFD buyer has an equitable interest in the property which is owned by the seller.”
The buyers actually “own” the property, since they have been given all the benefits of ownership (hence, equitable title) except the deed, which is legal title. I think if you had stated that legal title is owned by the seller, you’d have been accurate. For example, the seller may find it very hard, if not impossible to get a loan on the property sold via CFD. His “ownership” is severely limited.
“A L/Oer is a renter that has an option to buy the property.”
This is correct, but in the spirit of answering the question, the reasons you would sell using an L/O are:
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it is easier to get the property back via eviction, should the buyer stop paying.
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tax benefits include being able to claim Long Term Capital Gains on your profit once the buyer exercises the option, as long as it’s a year or more after the buyer has been in the property.
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higher than market rents
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Non-refundable option consideration…yours to keep if the buyer backs out or is evicted.