Lease Option vs. Land Contract - Posted by Bob Selby

Posted by Stacy (AZ) on June 12, 2000 at 14:54:32:

Ron, all you have to do is put a two-year balloon in the Land Contract. The sale I’m working now is a L/C; the buyer is giving 10% down, and giving 12.75% interest for two years.

In AZ, however, the laws regarding reposession of a house sold on land contract are seller friendly. If I was in a different state with a long foreclosure process for contract sales, I’d probably not be so pro Land Contract.


Lease Option vs. Land Contract - Posted by Bob Selby

Posted by Bob Selby on June 11, 2000 at 18:58:31:

My initial reasearch of L/O’s leads me to believe that they are well suited to generating cashflow in a 1 to 3 year (or less) period, either thorough the ultimate sale of the property to the lessor, or via the lessors rent payments up until such time as they default.

My question is, why structure a 12 month L/O with a buyer, rather than a 12 month land contract with a balloon? I realize (think?) that L/C’s offer the benefit of “sandwich” deals where as L/C’s do not, but other than that, what would make going one route more favorable than the other?

Bob Selby

Re: Lease Option vs. Land Contract - Posted by Russ Sims

Posted by Russ Sims on June 12, 2000 at 11:13:48:

Yes, it’s easier to get someone out of a house when you need to evict, rather than foreclose. But when you sell on a L/C you can genuinely sell the benefits of home ownership (you’re selling ownership vs. tenancy). It’s also possible, in my limited experience, to get larger down payments with a L/C. It’s not a stretch to ask for 5 to 10% down whereas with a L/O sometimes 3% can be a challenge. The other drawback with selling by L/O is that you are somewhat bound by local lease rates. You can’t really ask 1500/month for a home that would lease for, say, 1100/month. With a L/C you aren’t competing with rentals: you’re generally competing with mortgage lenders who are charging 10,11, and 12% for C and D borrowers. So it’s entirely possible to sell by L/C, charge 9.75 or 10% interest, and see a monthly cash flow that is 100 to 200% higher than the same property under a L/O would fetch.

It is possible to set up a “sandwich” L/C scenario very similar to what you are doing with your L/Os. You purchase properties “subject to” existing loans and resell under L/C terms.The principal is the same as the sandwich L/O but the cash flow is greater.

Re: Lease Option vs. Land Contract - Posted by BR

Posted by BR on June 11, 2000 at 19:56:28:

Bob, because if they don’t perform it’s easier to get them out with a L/O. Eviction vs Foreclosure…which would you rather do?

Quicker back end with L/O’s? - Posted by Ron (MD)

Posted by Ron (MD) on June 12, 2000 at 14:40:51:

L/C’s appeal to me because of the reasons you gave, plus I think you have less liability (e.g., lead paint).

However, it seems to me that someone buying on a L/C is expecting long-term financing from you. This means that you don’t get your back end for many years down the road. L/O deals are limited to a year or two. That seems like a very big deal to me, because that is probably where the biggest payday is.

Your thoughts on that?

Re: Quicker back end with L/O’s? - Posted by Russ Sims

Posted by Russ Sims on June 12, 2000 at 18:35:38:

Stacy is right: you can call for a balloon payment on a L/C that will be due in a couple of years or so. There hasn’t been a huge markup on the LCs I have done so far. I’m more in these for the cash flow so if it goes 3 or more years before my buyer refinances me, that’s fine because I’ll probably have a $200-$300 monthly cash flow going. You can structure the L/C according to your investment goal.