Which is better: a deed contract or a lease option?

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

Various states regulate Land Contract differently and some states do not allow its use at all. This is not a reflection on the Land Deal, 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, they want a buyer to pay for the property over an extended period of time. This installment payment technique would potentially 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 the property. the seller’s. money.

This type of contract is often used when the buyer wants to know that they are getting title to the property since they are paying money to the seller. 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 tenant of the property and would actually purchase 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-party 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 vacating the property and the resulting negative cash flow or allow the buyer to enter the property without conventional financing. The buyer has a sense of ownership, so they should treat the property differently than if they 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 ways to finance the owner, whether or not there is a mortgage on the property.

I have personally had experience with both deed contracts and lease options. I want to give you just one example of the use of each so you understand my concern for one over the other. I was approached a while back by a real estate agent who was a buyers 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 buyers 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 only need “refinancing” 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 in financing the investor and refinancing the buyers. The real estate agent’s deal with me was that she would find the properties after we had previously sold them to the investor, I would go in and buy them off the listing as much as possible and she would sell them to the investor for whatever we could get, presumably fair market value. The investor tied up the properties until he could get financing and resold them to buyers with only a small down payment.

If you’ve been here before, it’s like a pack of piranhas feeding on an injured cow crossing a stream: the mortgage broker, the title company, the attorney, the realtor, the inspection company, the survey company , the appraiser, construction or rehabilitation people, other selling investors, 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 my dislike for the deed contract he was using on the first four properties he purchased. His mortgage broker suggested he use them to get the refinance up and running in a year. But I explained 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; it’s 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.

Now I know the mortgage broker had no interest except 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 the next few years and that he had no risk. This turned out to be in July 2006 and the market sank by at least 50% of their buying prices.

Every deed contract he made was delinquent within six months and last year he called me to say he should have listened. She mentioned that she assaulted the mortgage broker and spent some time in jail (she wouldn’t tell me how long) 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 capacity with his lender. All of his properties went into foreclosure against him because he had the loans in his name, but not until after the buyers foreclosure began to release the bonds they held on the properties—his deed contract. If he had paid cash for each property, he would have had the same problem of foreclosure to get buyers out. His original agreement with his buyers was that they paid the taxes and insurance, but neither was paid as soon as the buyers defaulted.

I suggested that he discuss leasing 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 forfeited. The 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’ve discussed this strategy numerous times, but the eviction process simplifies the process of removing a defaulting buyer. The property can be leased 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 too much detail) are:

1. Make the lease and option two separate documents,
2. Breach of the lease agreement linked to the cancellation of the Option Agreement
3. Do not allow the potential buyer (Optional and Tenant) to file a Notice of Interest in 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. Holding 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 otherwise be possible by giving the buyer a closing credit 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 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 Agreement or Lease Option for your particular situation.

Leave a Reply

Your email address will not be published. Required fields are marked *