Posted by Bill Gatten on April 18, 1999 at 14:28:45:
Jim,
Thanks so much for your comprehensive reply. I plan to print it out and take some time to assimilate it.
Bill
L/O vs. Land Contract vs. Note & Mortgage (long) - Posted by Trout
Posted by Trout on April 16, 1999 at 18:08:32:
To my cyber-colleagues out there;
While I am not a frequent poster to this board, I am an incessant visitor, and I could not even begin to express the thanks for all the knowledge I have gained from this site. Thanks to everyone.
My question is as follows:
Picked up a wholesale junker that I think I am going to fix up and sell with financing. I am trying to pick the best way to do just that. The property is in an above-marginal neighborhood (not Main Street USA, but not a warzone either).
I am not sure of the differences/benefits of selling on a note & mortgage vs. a Land Contract. Here are a few of the questions that confuse me.
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Do you foreclose on noperformance of a land contract, or do you evict?
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With a LC, I don’t transfer legal title until the end of the term of the loan. Is the buyer able to deduct interest payments?
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For liability purposes, I am assuming that a note & mortgage is the better way to go because I will only be a lien holder, and have nothing to do with the title. Is this a correct assumption?
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I am also looking at anther possible L/O deal. Is it possible that I could buy on a L/O and sell on a land contract?
Should anyone CRE-Onliners find themselves in the Philadelphia area, I’ll take you out for a cheesesteak and we can talk RE.
Sincerely,
Trout
Re: L/O vs. Land Contract vs. Note & Mortgage (long) - Posted by Paul Mc
Posted by Paul Mc on April 17, 1999 at 01:16:42:
- Do you foreclose on noperformance of a land contract, or do you evict?
In New York, a court will grant to the buyer (or payor) the equity they have accumulated in a land contract AFTER the payor has owned the property for a certain lenght of time. The laws were changed in NY when a seller tried to evict the payor close to the end of the payors tenancy. He fought in court for the equity and won. Now the land contracts (in NY) state a time when the land contract is no longer a Landlord/tenant relationship but more of a Mortgagee/Mortgagor. Check it with your atty.
- With a LC, I don’t transfer legal title until the end of the term of the loan. Is the buyer able to deduct interest payments?
Yes.
- For liability purposes, I am assuming that a note & mortgage is the better way to go because I will only be a lien holder, and have nothing to do with the title. Is this a correct assumption?
To get your name off the title, note and mortgage. Using a land contract, you remain title holder. I require liability insurance for the property be bought and paid for by the payor of a land contract. Hope this helps.
- I am also looking at anther possible L/O deal. Is it possible that I could buy on a L/O and sell on a land contract?
I would sublease. What happens if you don’t exercise your option?
(I can’t remember where I may have heard it, but it may be possible to create a ‘second’ option which is only exercisable if the first option is exercised. Best check with atty).
Re: L/O vs. Land Contract vs. Note & Mortgage (long) - Posted by Jim IL
Posted by Jim IL on April 17, 1999 at 24:25:09:
What are your goals for the home?
Do you need CASH now, or CASH later?
what about setting a high price and saying in your ads that you are willing to consider terms?
Try that and let the buyers come up with a plan, then see if it fits with yours.
Then again, if you L/O it, you can sell for more, and if they don’t excercise the option, (apparently most do not), then do it again for more $$$. Plus, if you do the L/O and make the paperwork seperate, (a lease agreement, and an Option, with contingencies that if they violate the lease, the option is dead), you can evict them if they fail to perform.
Just my $.02,
Jim
Re: L/O vs. Land Contract vs. Note & Mortgage (long) - Posted by JPiper
Posted by JPiper on April 17, 1999 at 24:01:25:
- Do yo"u foreclose on nonperformance of a land contract, or do you evict?"
Most land contracts are written such that upon default, the status of the buyer reverts to that of a tenant and he’s evicted. That’s what the contract in all likelihood will say. However, if there is a legal challenge to this, you may be required by the court to foreclose judicially?.meaning time and money. Check your state law?this varies by state.
- “With a LC, I don’t transfer legal title until the end of the term of the loan. Is the buyer able to deduct interest payments?”
Yes.
- “For liability purposes, I am assuming that a note & mortgage is the better way to go because I will only be a lien holder, and have nothing to do with the title. Is this a correct assumption?”
Perhaps you could define a little better exactly what liability you’re referring to here.
- “I am also looking at anther possible L/O deal. Is it possible that I could buy on a L/O and sell on a land contract?”
I’ve never done one of these personally. I’ve asked a couple of attorneys about this in the past, either producing “no” answers or befuddled looks. This one carries some risk with it, so I’d definitely check with an attorney BEFORE you do this. By the way, I’d only want to do this one if my area had lower rent than an equivalent mortgage payment?.perhaps an area like California. The problem however in California is that you run a huge risk in the event of the buyer’s default?.see answer #1 regarding judicial foreclosure. This type of transaction in the midwest would in all likelihood make no sense.
JPiper
Re: L/O vs. Land Contract vs. Note & Mortgage (long) - Posted by Bill Gatten
Posted by Bill Gatten on April 17, 1999 at 18:43:46:
Jim,
Curious. Why do you say (apparently categorically) that a contingent purchaser under a Land Contract would have access to the active tax write-off (e.g., re. IRC Sec 163) when legal and equitable title (and Fee Simple or Defeasible interest) won’t transfer until the end of the contract term?
I know a Contract for Sale can be written so as to create a sale per se; but my understanding has been that doing so would result in an outright [taxable] transfer on day-one. And in such an event, wouldn’t that preclude the right of “eviction” by the contingent seller that you mention above? I that were the case, why wouldn’t a Wrap-Around work better?
In California, we of course have the Cal-Vet loan which is clearly a Contract for Sale (Land Contract); but in it there is no question as to whether full Fee ownership is being conveyed, or whether or not the conveyance is contigent upon future events or decisions.
Not contradicting here, Jim… I simply think I’m about to learn something else I didn’t know.
Thanks in advance.
Bill
Re: L/O vs. Land Contract vs. Note & Mortgage (long) - Posted by JPiper
Posted by JPiper on April 17, 1999 at 19:39:31:
Bill:
I doubt you’re about to learn anything you didn’t already know?.but here’s my answer in any case.
My contract for deed is 13 pages long, plus some additional attachments including note, amortization schedule, etc., prepared on my behalf by my attorney and changed to fit any specific circumstances by him.
When I read the document it reads as a sale?.with the exception that the deed is not given until the completion of the buyer’s obligations. Here’s paragraph 17 in the document: “Interest Deduction. To the extent permitted by law, Seller agrees to permit the Buyers, for income tax purposes, to consider the premises owned by Buyers so that the interest portion of the payments due hereunder may be deducted by Buyers in the event that Buyers may lawfully do so.”
My CPA sends the 1098 (or whatever the number is) to the buyer at year end showing interest paid. I show this as interest received in my tax return, and pay tax on it. As it pertains to the handling of this, I really don’t personally know the specific tax laws, but instead rely on the CPA for his knowledge. This is how he has handled it. I collect a tax and insurance payment from the buyer monthly, which I then forward to the county (taxes) or the insurance company, or in some case pay monthly myself on an underlying loan.
Sale via contract for deed has been treated as a sale from day one as it pertains to my tax situation?.and taxes paid accordingly.
But I think your question really has more to do with the “eviction” issue versus a “judicial foreclosure”. The contract has about 1 ½ pages devoted to what happens if there is a default. Basically, I’m required to provide a 15-day written notification to the buyer of his default. If the buyer fails to remedy this default within that 15 day period, I notify the escrow agent (my attorney) who will release a pre-signed quit claim deed to be recorded by me. Included in this paragraph is the statement “Seller shall retain all monies paid on the Contract as rent?” The buyer is then evicted.
When I arrived here from California I had LONG conversations with my attorney regarding this issue. My understanding is that land contracts are in widespread use here, that the court will uphold an eviction, and that my attorney knows of no cases where a judicial foreclosure was required. (By the way, this was NOT my understanding while in California). Fortunately for me, I have not had a default so I have not had the opportunity to test this situation. However, I know of various people who have had defaults, and who have evicted under similar types of contracts.
The funniest part of all of this is that this state is a deed of trust state, and a buyer can be foreclosed on very rapidly under the deed of trust. Because of this, if I sell in the future in this manner I will probably use an AITD. However, at this point I’m not selling with this method. These days I’m using lease/options because of my tax preference. Again, no reported cases here where a judge has ruled that a lease/option was a transfer of equitable title.
My general statement would be that not all states treat land contracts in a similar fashion. California would be one state where I would not use a land contract. Here they don’t appear to be a problem. Some states have specific statutes stating how the equity is to be treated. If I remember correctly, one state specifically treats the buyer as a renter unless he has in excess of 25% equity. So it’s hard to make a general statement regarding land contracts as it pertains to the status of the buyer.
JPiper