Lease Option Vs Land Contract
Greetings all. I am really concerned about this issue and have read many posts and believe I am in the right forum for some help. I thank you for your help. My home has been on the market for a long time. I do not need to buy another for a year or two. A young couple related to my neighbors want a Land Contract. They will have funds in 12 months. The property lists for 185, they offered 173 with 7k down, and a 30yr amort. at 6% with a 3 yr LC but verbally agreed to 12 months without responsibility for upkeep (I prefer). I was briefly advised to do a Lease/OtoBuy instead with those provisions stated, same moneys pd, as well as a 1-2 year balloon. I do not know which is a better situation because I do not understand the financial (and tax) implications. I will have a lawyer involved but hope to understand more.. I also have a real estate person involved and that is sticky as well. Your thoughts are greatly appreciated. :-?
If you have a real estate person involved, and have signed an exclusive right to sell, then you will be paying comission. This is obviously a major factor
The key difference between a land contract and a lease option is the owner, in a land contract the buyer is the owner (but not deed holder); in a lease, you continue to own the property, and they have a right to buy the property at some point in the future in exchange for the option consideratin fee (this is commonly yet incorrectly referred to as the down payment).
First figure out if you want to pay a comission to the realtor.
Next, get a credit report from the buyers - if they have 7k down and can afford the payments on a 165 loan, then they should just buy it outright - find out in advance what their reason is for delayng the mortgage; once you have this info you should be able tomake your decision - of post again and you;ll get more help.
Thank you very much
How much do you like these people? You're really about to subsidize their purchase out of your own pocket. Unless your price is above Fair Market Value, beware of accepting less than 10% down. If they want in for less down, then make it 9-10%, not uncommon at all. (I have one CD at 12%, guy has lousy credit). Buyers understand the implications of having bad credit, and you are compensated for the risk that they may flake.
I would seriously consider Lease Option, if only to retain more control. Then maybe the $7k would be the option consideration, 100% applicable to purchase but non-refundable. If anything, though, you should set the selling price above your current asking price, since there will be two years of appreciation to consider. Set a decent payment amount, and apply anything over fair market rent to equity/purchase. If they balk at that, explaln that either way--CD or LO--they get very little equity in the early years of the contract; it's mostly interest or, in the LO case, essentially rent.
What funds will they have in 12 months? If they say they can cash you out then (pay in full) then put a balloon in the contract (or set the option exercise date) for a year out.
Lacking further info or incentive, the numbers you present sound great for them, but terrible for you. And even worse if you have to pay a Realtor commission to boot. I'll bet you can do better. Good luck!
I am not sure what you mean when you say "I have a real estate person involved". Does this mean you have signed a contract for the "real estate person" to sell or list your house?
I am with loon on this one. The lease option sounds better for reasons of control. There may be another issue as well. If you are obliged to pay the real estate person when the sale takes place, then the buyer would have to qualify for a loan and complete the sale. If you have a land contract and you pay commission up front you will have a mess on your hands if the money does not materialize in 12 months.
loon and edmeyer, thank you very much. Your advice is very helpful and is in line with my general thoughts as well. I do not plan to pay the realator upfront, but I still come out behind regardless, well I break even. What a shame for a beautiful victorian that I adore. It has been on the market for 1 year and I am tired of paying for 2 homes. The tax concerns are still very real and no one seems to have any answers for those. Thank you both so much for your time and knowledge. W
The tax issues are fairly straight forward, however, I am basing this on my memory of the land contract I did years ago. With a land contract the buyer will essentially have all of the benefits and responsibilities of ownership. Buyer will pay taxes and deduct them as an expense, pay mortgage (possibly through the seller) and deduct interest expenses, pay taxes and deduct tax expenses, etc. This is the way it was when I did mine. The only uncertainty is whether or not it is possible to distribute between a buyer and seller under a land contract.
With a lease option, the seller retains ownership with associated responsibilities and deductions. However, if there is agreement, the buyer could pay seller the amount of taxes as part of the option consideration.
Also, with an option the income taxes from the option consideration is not due until the option is exercised or abandoned.