Re: Question on Land Contracts and Lease Options - Posted by JPiper
Posted by JPiper on April 18, 1999 at 17:58:21:
This is a question that I have pondered from time to time?..and asked several attorneys about. I’ve gotten answers ranging from “No” to befuddled looks. I’ve never gotten a “yes”. Frankly, I think it can be done, but most of the time it doesn’t make sense.
Here’s what I mean. If you’re in an area where rent is higher than mortgage payments, then lease/optioning in order to sell via land contract is going to be problematical from the start, from a numbers standpoint. There may be a special situation type property where rent is very low relative to the price where you could build a case, but I would say that in large parts of the US the rent is higher than current mortgage payments. California presents the opposite case. Rent there is lower relative to purchase price, so you can come up with some fascinating numbers. The problem there is that a land contract would not be wise due to the legal treatment in the event of a default ie the likely requirement that you would need to judicially foreclose.
The next problem is that one wonders whether you can judicially foreclose when you don’t own the property?.you only have an option. While this gives you effective control, there’s a question in my mind whether you could institute a foreclosure proceeding without title. Some states would necessitate judicial foreclosure of a land contract. Perhaps this is one for a lawyer to check out.
Next, if the original seller has an existing loan, he’s writing off the interest. If the new buyer writes off his interest on the land contract, it’s clear that two parties are writing interest off for taxes purposes on the same property. I doubt that the IRS is going to approve of that situation should they discover it. If the new buyer does NOT write off interest, he has lost one of the advantages to having a land contract to begin with. On top of that, the new buyer is paying you interest, which you may not be able to offset against your lease payment for tax purposes.
But again, perhaps the most important reason working against this type of transaction would be the first reason. Unless you have an unusual property, or live in an area where rents are very low versus purchase price, it may not be particularly attractive in an economic sense.
As Jboy mentions below, there are lender programs available for refinancing lease/options currently. All things considered I would say this would make more sense.