Question on Land Contracts and Lease Options - Posted by Jim IL

Posted by Ralph VA on April 18, 1999 at 15:06:35:


I was really adressing Laure’s issue of whether one can sell on a land contract. I was presuming that the buyer was at the end of the l/o period, or the buyer had obtained financing before the end of the period.

My point was only that it can be done.

But, you are correct about the land contract and the lease option.


Ralph C. from VA

Question on Land Contracts and Lease Options - Posted by Jim IL

Posted by Jim IL on April 17, 1999 at 23:05:29:

Hello again,
I’ll try to make this short:
If I get a home under a Lease Option from my seller, can I sell it with a Land Contract?
I ask this, because I recently found a lender that will allow a person with bad credit, do a refi after six months of a land contract. They require only the six months worth of cancelled checks and a small “cushion” in the property. I was told the “cushion” could be in the form of a small Seller carried second mortgage.
If this is legal and can be done, then we can cash out our L/O’s a lot quicker.
This is a new program, and I’d love to use it.
I had thought of simply buying the homes forst with a land contract and then doing another one to my buyer, but then the issue of “Down payment” comes up with my seller.
any input here is appreciated.
Jim IL

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.


Re: Question on Land Contracts and Lease Options - Posted by J. Clifton

Posted by J. Clifton on April 18, 1999 at 16:15:50:

I believe Bronchick was asked this question on the audio tape portion of his “Real Estate Lawyer” course. His basic answer was theoretically yes, but it wouldn’t work tax-wise, as both the legal-title owner and the land contract equitable-title holder would claim the tax benefits on their returns, thus getting one of them in trouble with the IRS.

Re: Question on Land Contracts and Lease Options - Posted by Laure

Posted by Laure on April 18, 1999 at 09:59:02:

You can’t sell on a Land Contract unless you own the home. You can only Lease Option it out.

Laure :slight_smile:

Re: Question on Land Contracts and Lease Options - Posted by JohnBoy

Posted by JohnBoy on April 18, 1999 at 01:05:39:

Did you talk to your lender about refinancing the l/o? Most lenders will refinance a l/o the same as they would on a land contract. There shouldn’t be any difference when refinancing the two.

Re: Question on Land Contracts and Lease Options - Posted by Ralph VA

Posted by Ralph VA on April 18, 1999 at 11:25:19:

Maybe I missed something, and I’m sorry if I did, but you can sell on a land conract. Its accomplished at a simultaneous closing. your buyer pays you your sales price of, let’s say $50,000., and you turn around and pay your seller $40,000. your seller then signs the deed over to either your buyer, or you, and then you sign it over to your buer. Either way, your new buyer has the deed to the property, your seller has his $, and you keep the spread-$10,000.
As to the down payment, try a Russ Whitney, among others, technique of financing the down over 6-12 months, or cash advances on your credit card.

Good Luck

Ralph C. in VA

Re: Question on Land Contracts and Lease Options - Posted by JohnBoy

Posted by JohnBoy on April 18, 1999 at 14:26:24:

I think you missed the point on this. What your describing is a cash sale, not a land contract. If your buyer was paying you $50k at closing where you were giving the seller $40k and walking with the spread of $10k cash at closing then that would be a cash sale whereby your buyer was paying you with his own cash or a new bank loan. That’s not a land contract.

A land contract is where the seller would carry the paper and title stays in the sellers name until the contract is paid off.

The question Jim was asking was, if he was to enter into a “Lease Option” with the “Seller”, can he turn around and then sell the property on a “Land Contract” to “His” buyer while he was “Lease Optioning” the property from the seller? The answer is yes, it could be done, but it would have a lot of risks involved and I personally wouldn’t do it. Especially in IL.

When you sell on a Land Contract in IL. you can not prevent the buyer from recording the contract. If you put any clauses in the contract that tries to prohibit the buyer from recording the contract then your buyer can not be held liable for that contract. You could have a real legal mess on your hands from trying to sell someone elses property you basically had no right to sell before exercising your option.

The other point is that most lenders will treat a L/O the same as they would a Land Contract when it comes to refinancing the property. If the lender Jim is working with has some kind of a problem treating a L/O the same as a Land Contract for the purpose of his buyer getting refinanced, then I would wait for 12 months and then get the tenant/buyer refinanced. Most lenders will refinance a L/O after 12 months of making payments on time.