How Is L/O Better Than A Land Contract?
I hear many more people talking about L/O than land contracts. I have not used either one but I am leaning towards trying the land contract in the near future. The land contract seems to have many advantages(providing you have good credit) for a seller. You don't have to find an individual that can come up with the money for the option(if you have to sell to someone on an L/O isn't because they have money problems already?), and you have much stronger rights and can simply take the property back if they don't stay current on payments and keep everything they have paid. LIke I said, I haven't used either so I am talking out of total inexperience and ignorance on this topic!
correct, the only advantage to having a L/O is that you can make monthly profit quickly and with less $ out of your pocket
EX: land contract . they might want 10% down at a 8% intrest
V.S a L/O you might be able to give them a premum rent of 550 a month and sublease at 650,
it all depends on the amount you have avail. and if it would be a good invstment
Roy
One is not better than the other at all. They are both just tools in your arsenal. When you have a land contract, legally, you don't just take the property back. The legal method is to go through the foreclosure process which can be lengthy and costly. Tha does not mean that I wouldn't just pay someone to leave and negotiate a better solution than what the legal system provides. Currently most people believe that as a seller you have more power over the property if you sell on L/O for the simple fact that if they don't pay, you file the eviction which in my state(OH) is much shorter and much cheaper than a foreclosure. There are no equitable title arguments. Now as far as the downpayment or option money depending on the method, you are the one in control. You can option a prop. with $10.00, I've done it. You can also L/C a prop with $10.00 down. I think as a seller this is ludicrous, but the situation may warrant it. This is not a business of absolutes. In a world of marl and quicksand you do what is neccessary to stay afloat. Again, current accepted business practice indicates that if a buyer has a large sum of money down, you give him a L/C. If they have only a small amount down then you L/O. But... it is soley your decision. That's what makes having your own business so fun. I once took a MH in on trade on a house. I gave them $10,000.00 off the selling price, however they still owed $4500.00 on it. I paid the $4500.00 and took the remaining $5500.00 off the purchase price. To this day I haven't figured out how much I really have in the MH. I guess my accountant knows. Anyhow, the point is, they put down $1800.00 cash, and I gave them $4500.00 cash and got a MH, and Land contracted the property. They got a 30 year mortgage, w/ a 5 year balloon, or I may carry them for the full 30. I'll make that decision when the time comes. BTW, my existing mortgage will be paid off in 14 years. so I would have the entire payment as cashflow for 16 years althouh I may personally refi them for another 30.
I am starting to ramble, but I hope this helps.
Good Luck,
Shawn(OH)
Thanks for the feedback. I'm still confused though. Maybe it varies by state but from the little information I have heard on land contracts in my area, both people I spoke with mentioned specifically that the beauty of the land contract is that you don't have to go through the foreclosure OR eviction process. I was told that if they get 45 days behind you simply take the property back. Since they aren't a tenant and don't have a lease, and you own the property(I think a bank has to foreclose because they don't own the property they just have a lien against it) you can ask them to leave and keep everything collected to that point. Again, this is about all I heard on the topic and I didn't ask any questions because I wasn't trying to sell anything at the time.
I will add that the reason I am considering this is because I just had a realtor friend mention that he knew a guy who was doing extremely well by selling properties for $1.00 down on a 15yr land contract.
$1 down, huh? While I'm sure that he sells alot of properties, I would question the quality of tenant/buyers that he gets, especially if it were no qualifying.
As far as the land contract thing goes, you will either have to evict or foreclose. It will depend on your state laws AND the terms and conditions of the land contract. You can't simply kick the buyers out. The reason is, as you said, the buyers on a LC are not tenants, but actual buyers. How you bypass the foreclosure process is thru the contract terms which usually state that after a set number of days late on a payment, the contract is considered null and void. At this point, the buyers' become tenants, which can be evicted. As loanwizard stated, though, it is usually easier to pay off the tenant/buyers to leave than it is to go thru court proceedings.
Though i haven't found it to be true (at least in my area) some say the you get more down with a land contract versus a lease/option. Due to you setting the interest rate and terms of the land contract, you can usually make more on the monthly than a L/O.
One of the biggest possible differences in the two methods might be the tax differences. In most instances, a L/O is not considered a sell, and the option deposit doesn't have to be considered income until the option has expired or is exercised.
With a land contract, it is considered a sale, with taxes due from the profit. Worst case here, you will be charged taxes on the entire sale, example: you sell on L/C for a total purchase price of $100K with $1K down. IF you paid $75K, you'll owe taxes on $25k the year it is "sold" or the year the land contract started.
Best to check with your attorney and your tax advisor before making a decision one way or the other.
Roger
Quote:With a land contract, it is considered a sale, with taxes due from the profit. Worst case here, you will be charged taxes on the entire sale, example: you sell on L/C for a total purchase price of $100K with $1K down. IF you paid $75K, you'll owe taxes on $25k the year it is "sold" or the year the land contract started.
Just to clarify. Roger is exactly correct on the tax treatment IF you are dealing with a flip property. The sale is treated as a dealer disposition, in the manner
as Roger described.
On the other hand, let's consider the case where the property you are selling is one of your investment rental properties that you have had in service for a few years. You are selling to your tenant on a Land Contract (also called a Contract for Deed). In this case, the tax treatment is an installment sale. Your profit from the sale is received as a downpayment, and then in monthly installments. Depreciation recapture is paid in the year of sale, but the rest of your profit is only taxed in the year in which it is received at the applicable capital gains tax rate. Interest income received is taxed as ordinary income.