Anytime you hold or accept a deposit of that size, or moreover that percentage of the purchase price, the deal would be construed as you being a lender and you would most certainly have to foreclose rather evict… Regardless of legal format of the deal. Otherwise if you attempted to evict, the tenant would surely be entitle to a return of advance rent paid. That would be a case of unjust enrichment that would be easily proved, IMO.
So the format becomes moot in such a case. I would have no problem doing a LC with a buyer in that situation. However, with that % of down payment, you might be surprise at what a conventional lender might do toward making a new mtg. You are in the hard money category and as long as the property has adequate value, you might be surprised.
One other caution here, you hopefully owe no more on your mtg than the balance or payoff of the LC or L/O. Many states have limitations on Vendors accepting a down payment that exceeds the equity that they themselves have in the property. A default here can do serious harm to the Vendee (buyer), and many states have enacted such limits, so be careful here.
I’m in the process of putting a deal together with a buyer on a prop I have. Because of his current financial situation he’s open to a L.O. but is only familiar with a land contract. I couldn’t really explain the difference either.
Whats the differences? Any legal advantages/disadvantages with one over the other? I’m in Michigan.
Re: Land Contract vs. Lease Option - Posted by Natalie-VA
Posted by Natalie-VA on July 14, 2007 at 15:59:24:
A land contract is sort of like an installment sale. He makes payments to you, and after he makes the last payment, he gets the deed.
A lease option is just a lease with an option to buy later.
Either way, you want to get some money out of him up front.
You should research the laws in Michigan to determine how to get him out of the house if he doesn’t pay. If he’s on a lease option, it may be easier to get him out, but it depends on your state laws.
Posted by Craig (IL) on July 14, 2007 at 12:58:24:
The difference between L/O and Land Contract is humongous!! If you don’t know you and your seller could get in deep trouble.
I’m not going to write a logn lecture here. You can find anweres to your question on this sight using the search feature. Also, join a real estate investemtn group in yoru area and become privy to a REI library with news artcles on the subject.
MOST IMPORTANTLY: Lease Options have major pitfalls for the uninformed. Don’t get into such a deal unless you first become educated.
OK, thank you all for the feedback. His deposit would be substantial, in the $50’s+ for a prop valued in the mid-$160’s so I’m fine other than he has knowledge of land contracts and lease options and I’m vice-versa.