Going from memory but I believe
Less than 10% down, 10 day Notice
10-20% Down, 30 Day Notice
20% or more 60 day Notice
So if they put down more than 20% it’s better to Foreclose because in Texas that’s 21 days after you give the acceleration.
There are also statutes in Texas that make contract for deeds very unfavorable, like if you dont disclose or handle the termination of contract correctly then the seller is liable for every payment made back to the seller. It involves the Border towns mostly, and am not sure if it extends fully to all parts of Texas.
But, like you said, if it walks like a duck, quacks like a duck…
For a newbie, which is the better method to begin? Land Contract OR Lease Option. And, can you explain the difference between the two. My plan is to flip properties and also hold a few.
I have also been trying to evaluate these two alternatives. Hopefully, someone will correct me if I’ve got it wrong, but:
Land Contract: advantages are that you are likely to get more money up front from the buyer and you are not the landlord (this means you are not responsible for repairs and you don’t have a lead paint exposure)
disadvantage: term of the contract is usually longer than L/O, so you don’t get your back end cash out until much later
Another consideration that is not consistent from state to state is the length of time it takes to remove a deadbeat from your house. I assume it generally takes considerably longer (and more legal expense) to foreclose on a land contract buyer than to evict a tenant buyer.
I’m still struggling with which is the better route. I like the quicker pay-off with a L/O, but don’t like the lead paint liability issue and the landlord responsibilities.
Hopefully, someone with experience in these deals will shed further light.
Re: Land Contract OR Lease Option - Posted by Lori Samson
Posted by Lori Samson on May 26, 2000 at 24:49:25:
If you use a land contract there is so much room for law suits if you do not have a near perfact contract. One of the first ones I did I copied from the law library in down town Dallas. Another investor told me to do that and I did. Some how there were several pages that were missing and like how was I supposed to know that? I cancelled my buyers contract and then I evicted them for non payment. As soon as they walked out the court room doors they turned and went to the counter to file an appeal. I knew I was in trouble! Eight months later and 14 thousand dollars later, I paid them to get out. Legal extortion! The loop holes their attorney found where unbelievible! The attorney in our investor group has even told me that after all the nightmare problems that can happen because of land contracts/owner financing he is convinced that lease purchase is the only way. You can amortize a lease purchase so that it performs just like a land contract. Lori
YOU ALWAYS HAVE THE LEAD BASED PAINT ISSUE!!! Make sure you understand this. The LBP disclosure is required on all houses built before 1978, period. This is a HUD requirement, it has nothing to do with your method of financing, conveyance, or anything else. In other words, the govt. doesn’t care if you have a land contract or a lease option, or if you sold the house for 2 cows and a goat. Be on the safe side, it’s just a little pamphlet, I think it’s even on Bronchick’s legal wiz site available for free download. Take it from a licensed RE agent, when in doubt, DISCLOSE. Otherwise your post is fine.
Lori, can you elaborate more on “You can amortize a lease purchase so that it performs just like a land contract”? I’ve been leaning more towards land contracts for this exact reason.
Example:
I buy a house at 100,000 FMV, subject to 8.5% underlying financing, $768 payment. I resell on a land contract, 110,000 price at 11%, $1047 payment, I get $279 difference each month. How can I get this spread on an l/o, most of them I’ve seen only work at about an extra $100/mo, and most of the profit is on the back end when they exercise option to purchase at a higher price.
Right now, I’m most interested in monthly cash flow, in order to replace, or at least equal, the income from my job. I’ll worry about big back ends later.
Lori,
I have seen your posts and realize you know much more then I about L/O’s. However,doesn’t amortizing a Lease Option give the Tenant/Buyer some type of an equitable position if infact they fail to exercise their option and then want to take you to court?
Re: Here’s how you solve it. - Posted by Lori Samson
Posted by Lori Samson on May 26, 2000 at 23:43:36:
To turn a L/P into a look alike land contract, you know how much you want to get in monthly payments and you know the term (30 years) and the only missing element is the interest rate. If you show the tenant buyer how they can buy it on a long term lease purchase for 30 years and on the 30th year they receive title. I wouldn’t even bother adjusting the sales price as it increases in value because you wouldn’t adjust it if it was a land contract so, you wouldn’t adjust it in a lease option agreement. You are only agreeing that if they pay X amount of dollars each month they can buy it on the 30th year for say…a dollar. They will never stay in the L/P for 30 years. They will default or refinance somewhere down the road. I can get as much as 8k down on a long term L/P. Why CAN’T you get as much as you would in a land contract? It takes the same leagth of time to find someone with 8k rather they are L/P or Land Contract. That’s the beauty of L/P because you can get so creative that you’ll amaze yourself! Lori
Typical would be to create different strike prices on the option on a yearly basis. Not on a monthly basis. Leases longer than three years may have a problem but what’s wrong with renewals or renegotiation. Anyone can sue for any reason but with a properly worded contract they are not likely to prevail.
I definitely agree with one point?.this is a land contract look-a-like. Based on your explanation, and assuming you have put this into writing in a similar fashion?.this is at a minimum an installment sale for IRS purposes. It could also be enough to require a judicial foreclosure to get a defaulted party out the house. (Although I understand that in Texas there is a ?land contract statute? which I?m not familiar with).
Nevertheless, for IRS purposes what you?re proposing here is an installment sale. Do enough of these and you?re a dealer?in which case the tax on your entire profit is due immediately, despite not having received all the payments. No depreciation or 1031 exchange either.
Assuming you?re accounting for these as a lease, this recharacterization could trigger significant penalties and interest?.something to consider.