Which is better: a deed or a lease option?

A deed contract is also known as a land contract or installment sales contract. It is simply an agreement or contract between the seller of a property and a buyer in which the property is not transferred to the buyer until the terms of the contract are fulfilled. It sounds very simple and it is except for the fact that the rights of the seller become the issue if the buyer does not comply with the Contract.

Various states regulate the Land Contract differently and some states do not allow its use at all. This is not a reflection on the Land Contract, just the thinking and experience of legislators in these states.

So the process looks like this: A seller wants to sell a property, and for financial purposes, or for capital gains purposes, wants a buyer to pay for the property over an extended period of time. This installment payment technique would possibly reduce your capital gains or, in the financing situation, allow a buyer who cannot obtain financing to live in the property and purchase it for an extended period of time, or until conventional financing can be obtained to replace it. that of the seller financing.

This type of contract is often used when the buyer wants to know that they are getting title to the property because they are paying the seller money. The alternative would be for a seller to give the buyer a lease option to purchase the property. In this case, the buyer would only be a renter of the property and would actually buy it in the future. In some cases, buyers may not like the control that is lost by not having a deed in their name and may refuse to pay rent in lieu of a mortgage.

The lease option can be a one or two party contract and is specifically an option agreement associated with a lease. The lessee, or prospective buyer, then leases the property to the seller until such time as he decides to exercise the option and purchase the property.

The benefits of each type of contract are that a property can be sold, transferred or rented to stop vacancy of the property and the resulting negative cash flow or allow the buyer to move into the property without conventional financing. The buyer has a sense of ownership, so you should treat the property differently than if you were just a tenant. Both are legal documents that are adjudicated in the court system under contract law. Some lenders may disagree, but both are viable as ways to finance the homeowner, whether or not there is a mortgage on the property.

Personally, I have had experience with both deeds and lease options. I want to give you just one example of the use of each so that you understand my concern for one over the other. A while back I was approached by a real estate agent who was a buyer’s agent for a new investor who wanted to buy as many properties as possible while he did a deed on each property. The investor would buy the properties using his credit to obtain the money to finance each business.

The investor’s ultimate purchasers were county employees and many were teachers. It had a simple premise, buy with financing from conventional lenders and sell to these buyers who otherwise could not have obtained financing. In a year get them financed by a conventional lender because then they would not just need to “refinance” and not a new loan. The idea was that it is much easier to obtain refinancing than new financing. Sounds almost perfect, right?

The investor was a guy with some money but no experience, so the whole idea was hatched by the investor’s mortgage broker, whose interest was to finance the investor and refinance the buyers. The real estate agent’s deal with me was that she would find the properties after I had previously sold them to the investor, I would go in and buy them below the listing as much as possible and she would sell them to the investor for what we could get, presumably. fair market value. The investor tied up the properties until he could get financing and resold them to his buyers with only a small down payment.

If you’ve been here before, it’s like a herd of piranhas feeding on an injured cow crossing a stream: the mortgage broker, the title company, the lawyer, the realtor, the inspection company, the survey company. , the appraiser, construction or rehabilitation people, other investors sellers, etc. . All of these trades or professions were simply looking to make money from the original buyer, myself, and the novice investor. Of course, none of these non-buyers had any financial interest in the property.

I spoke to the investor after I bought and sold him a specific property and told him of my displeasure with the deed contract he was using on the first four properties he purchased. His mortgage broker suggested that he use them to make the refinance work in a year. But I explained to him that if his buyer didn’t make the payments, he would have to foreclose on the property, which could take time, maybe years in our state.

The mortgage broker argued with me, after all, he had already done four properties with this investor, so he was an expert and a guru told him it would work. I’m not saying it wouldn’t work; just that buyer removal can be a long and short battle. The mortgage broker proceeded to tell me that he was wrong and that foreclosure in this particular county only takes 2-4 weeks.

I now know that the mortgage broker had no interest except for commissions, so I didn’t argue and told the investor to be careful, especially if the market went down. The investor assured me that the market would continue for years to come and that I was risk free. This happened to be in July 2006 and the market sank by at least 50% of their purchase prices.

Every deed contract he did went into default within six months and last year he called me to say I should have listened. She mentioned that she assaulted the mortgage broker and spent some time in jail (wouldn’t tell me how much) and the mortgage broker is now a bartender at a local tavern.

The investor made a total of seven properties before running out of financing with his lender. All of his properties went into foreclosure against him because he held the loans in his name, but not until after he began foreclosing on the buyers to release the bonds they held on the properties: his deed. If he had paid cash for each property, he would have had the same foreclosure problem to drive out buyers. His original agreement with his buyers was that they would pay the taxes and insurance, but neither was paid as soon as the buyers defaulted.

I suggested that he do lease options with the buyers. The difference is that the buyers would be tenants and could be evicted using their lease and their Option Consideration would be irrevocably lost. Option consideration is not a deposit, so don’t even refer to it as such or you may end up having to pay it back later.

I have discussed this strategy numerous times, but the eviction process simplifies the process of removing a defaulting buyer. The property can be rented over and over again if required, even in a declining market. Some of the most important aspects of this type of contract (without going into many details) are:

1. Make the lease and option two separate documents,
2. Breaching the lease agreement linked to the cancellation of the Option Agreement
3. Not allowing the prospective buyer (Optionary and Tenant) to file a Notice of Interest at the Public Registry,
4. Make the lease payment at least as much as the mortgage payment will be when the buyer finances in the future,
5. Hold the tenant responsible for any repairs under $2,000,
6. Make the time to cure a breach reasonable (as required by local law), and
7. Collect more rent than would be possible by giving the buyer a credit at closing for the excess; if they close, otherwise you keep the surplus.

In short, buyers don’t like lease options because they lack control of the property if they default on the lease payments. Remember, if they can’t get financing to buy your property, they have no choice but to go elsewhere. It is in your best interest to find another motivated buyer who wants your property. Always consult with a local attorney about the ramifications of a Land Contract or Lease Option for your particular situation.

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