Lease Option Vs. Land Contract
Can anyone tell me what advantages or disadvantages there are in doing a Lease Option or Land Contract? Any input is welcome.
Can anyone tell me what advantages or disadvantages there are in doing a Lease Option or Land Contract? Any input is welcome.
they are too totally different structures. with the Land Contract, basically the seller if taking back a note to finance the property.
With lease option (if I finally have this terminology down, you own the property and then lease to a person w/ the option to buy the property at some future date.
You could buy w/ a land contract and sell w/ lease option.
ejenk,
Glad to meet you.
If you are purchasing the property with a Lease Option then you can only sell with a Lease Option, I am talking creatively now.
If you are purchasing Subject To then you have the option to sell either with a Land Contract or Lease Option.
There are many different answers between the two as to which one is best for your style of investing, I prefer the Contract for Deed, Land Contract, Contract of Sale, they are the same only the names change in different locals.
If you want to make your money in a short period of time on the property then a Land Contract will work for you as these are more likely to see the buyer refinance.
If you want to hold the property for a longer period of time then Lease Option would be the way to go because they are less likely to be refinanced by your tenant buyer.
These are only one of the differences, there is a rather long list.
John $Cash$ Locke
John,
If I may I would like your comment on this deal I am putting together.
I control a property that I am doing a lease option on. The owners are current in the mortgage and the real motivation is to move out of Ca. and back east where the rest of the family is.
The home is worth $150k and I own the option at $110k. There is about $5k worth of minor repair. I am doing the option with no option fee to me (cost of repairs of $5k to be considered option fee). Option term is for 3 years with the right to assign or sublease at my discretion.
The question, do you see anything wrong with doing this deal in this way? Would you have done it differently?
Thanks for your time to answer.
Dave
[addsig]
Dave,
I see no problem with the way your deal is structured.
After a while you will find that getting the deed is just as easy as getting the option, many people start out using a lease option method then switch to getting the deed.
One of the problems I see with Lease Options is that anything that happens to your seller liens or encumbrances attaches to the property, once you have the deed this won't happen.
By the way congrats on the deal, you will do very well with this one. I do not discourage anyone from using any creative investing method if they are comfortable with the method and making lots of money. LOL
John $Cash$ Locke[ Edited by JohnLocke on Date 06/09/2004 ]
John,
Thanks for the input. I appreciate your willingness to help.
Dave
[addsig]
It was a lovely January day way back in www.1994.The police had just busted down the door of the little 800 sq. ft. 2br lba house tastefully located on a 45 by 135 ft lot in the slumy area of North Hollywood.
As the front door slid gracefully sideways and the police burst into the dwelling, a virile young handsome Real Estate Broker happened by. Knowing the owner who was standingby wringing his hands, he stopped and joined the spectators observing this the last days of a thriving Crack House operation.
In any case he offered to help the owner out by lease optioning the house as is.
The deal the Broker would pay $900 a month of which sum $450 would apply on the purchase of the house. The sale price of the house would be $99,000. Of course the house at that instant was only worth $83,000, but wot the hell. Screwing a broker is a well known California Custom.
The lease was signed by all parties and the Broker flexing his muscles to relieve the strain on his restricted brain. Then stuck the document in his pocket.
After the police had finished their semi sub assmbly the Broker removed the damaged parts, Arranged to convert the garage into a small single unit with new bath. Replaced all the broken doors. Lined the back portion with French Doors and painted the hell out of everything. Actual Costs about $16,000. He then moved in and happy in the colorful neighborhood inhabitants stayed for ten years.
At the end of ten years, he sold the place for $410,000. Opened the escrow and called the owner. The nice Broker informed the owner that a balance was still owed on the purchase of the property and that amount was $44,000.
Now this was a very good deal. Of course nobody could fortell the increase in property value so it was perhaps an act of divine intervention.
A few days latter the Broker was served with a legal action by the owner. In a few days they went to court and the judge to whom the matter was assigned looked over the Lease Option and then delivered his opinion. This was a document created by a Licensed Real Estate Broker and the poor property owner had been taken advantage of and accordingly it was the thought of the judge that a proper settlement of the matter would be to give the property back to the Owner and the Real Estate Broker take nothing. No recovery of funds spent in making the house habitable and improved. The owner was entitled to possession as the lease was now terminated.
Why you may ask. A Real Estate Broker must conduct himself at a higher level of conduct then the ordinary person. He must at time of contract execute other documents which insure that the owner of the property is fully informed of the fact that the Real Estate Broker has more knowledge and experience etc. etc.
The Broker left a broken man, his escrow was cancelled and the old owner flush with a new and wonderful profit announced that of course he had no knowledge of this hidden secret of the person who leased and executed the lease option agreement. The fact that this Broker had helped him purchase a large commercial property and then had directed the conversion into a Auction Hall was purely an abstraction.
Now this was a loss and ill timed. But a lesson to be learned.
Moral: When it comes to papering a transaction there is no such thing as TOO MUCH. Pile the documents on.
Become the PooBah of modern times.
Have the Annex of the Document outweigh the original contract at a ratio of ten to one.
Cheers, thru my tears. Lucius 8-) 8-)
ejenk:
I am sorry if I miss lead you. It's now clear I misunderstood your mdg.
Hi CJ and John,
Thanks for your feedback!
I am currently in the process of selling our house (by owner). Our mortgage was paid off with a Home Equity line of credit so that we could get the lower interest w/ the option of paying interest only, if necessary. The house appraises at 160,000 and we owe 110,000.
Which option would be better in this situation a Land contract or Lease Option? If the buyer/ Lessee decides to stop paying, which option would take the least amount of time and cost to evict them?
I'm new at this, so if there might be other options that I'm missing, please offer up your ideas.
Thanks again!
As John$Cash$Locke sad, if you have the chance to squize the deed in your hand, don't fold the lease option agreement in your back pocket. It's just an inferior document. Right Lucius?
One of the greatest private investors of our creative times, Robert Shemin, the lawyer himself, always suggest you hire a lawyer to do your paperwork. Why? Because his malpractice insurance will cover your loses in case something similar to Lufos' (story) happens to you. God forbid. And I tend to agree. Lucius example explains it all.
Lesson learned: Don't be so darn cheep! Always apply insulating buffer of extra tide paperwork, followed by the good man dressed in navy blue, Brooks Brothers pin striped suite. (I hope you can aford it) If the S. happened and his writing take a dive in good judge's court, then hire another "suit" to sue the first one and you'll win one way or the other. This plan works. Guess how I know it?
And if your name is Lucius who wrote the above booboo tail, file le' appeal in Federal Court and hope the more conservative judge will take your side.
Your chances to win: bellow 5%. Well, if you have no other choice, what the heck, at list you'll not be blamed by your prettier half and disappointed cat, for not trying.
I am sorry for your losses Lufos. I really do but it seems that cause and effect laws has taken the common toll. It shouldn't happened this way, especially after I am sure, you neatly reported all the (cash) income coming from that converted garage.
Let us know how the appeal goes. Those high end presentation tend to be the most melodramatic but you never know.[ Edited by REI123 on Date 06/10/2004 ]