When to sell on LC vs. L/O? - Posted by SueC

Posted by SueC on March 16, 2001 at 08:17:19:

Eric, thanks very much for the detailed answer, and for the PACTrust idea. Yet another problem with this place is that it’s a nicer property in a marginal neighborhood, that is, I wouldn’t expect buyers willing to pay above FMV or put down more $$ to buy this place. Too bad PACTrust won’t solve that one! :slight_smile: Getting $11-12K to bring the loan and taxes current plus something for the seller would be unlikely (more than 10% of the $105K sale price).

If the interest rate and therefore the payments were lower, it might be do-able but right now this deal looks too tight to work. Thanks again.

Sue

When to sell on LC vs. L/O? - Posted by SueC

Posted by SueC on March 15, 2001 at 13:07:35:

What would make it more advantageous to use a land contract as opposed to a lease option to sell a property?

I’m looking at a pre-foreclosure property, and would take “subject to”; I’m thinking of selling on a lease-option, but then I wondered why not sell via a land contract that would in effect be a wrap?

I don’t understand a lot of the detail of selling on a wrap, so what am I missing here? While I’m at it, the underlying mtg is at 14% (!) which kills my cash flow until the buyers buy from me, so I’m looking for a short-term L/O anyway.

Thanks

Sue Caskey

Where do you invest?? - Posted by JasonWDTX

Posted by JasonWDTX on March 18, 2001 at 01:20:53:

As far as using a LC or LO it really depends on where you live and invest. The main concern is getting the property back in case of default by your buyer. Both methods are “agreements to buy” as far as you and your buyer are concerned. If they buy, then GREAT! However, if they default, then it starts to matter which way you did it.
For example, in Texas, it really doesn’t matter. LC’s and LO’s are almost the same. In fact it has been said that a LC is a glorified LO!! I have used both in good times and bad (eviction) and was in the same boat on both methods. I haven’t seen a major advantage of one over the other.
However, in some other states, such as Oklahoma, LC’s are considered “equitable mortgages” and there is a HUGE difference in getting rid of the Buyer in default. In Oklahoma its better to use a LO for selling with terms.
You need to find out how it is where you live. If things go good then there is nothing to worry about, however if they go bad then you better be in the best position that you can be in. Its better to find out now rather than later.

Jason

Re: When to sell on LC vs. L/O? - Posted by Bud Branstetter

Posted by Bud Branstetter on March 16, 2001 at 11:31:44:

Sue,

I use an approach on subject to property that says I don’t want to buy into the top 10% of value. I also want to get at least 2 dollars for every dolar that I will invest. In your case it would cost 12K to catch up the payments. How much holding cost or fixup? For that 12K+ I want 24K+ of equity and I don’t really want it in the top 10%.

A tenant of the Pactrust is that at the termination of the trust the property will be sold at FMV(unless otherwise agreed.) You can set the length for any term you want. It is just that the longer you do the more appreciation you can get as you want half that appreciation. You also insure that it is an investment and not a disguised sale. If there were a lot of equity and I want cash then I would shorten the term. I might use the IRA so I didn’t worry about capital gains or other tax issues.

I could do similar things in a conventional manner by giving the TB credits of equity for higher payments. But since I already have the Pactrust documents I would do it myself with that concept. It may also be one that is worth doing one of those 95% investor loans to get the interest rate down and then selling on a Pactrust arrangement. It may not have enough equity to make it a smart investment.

Re: When to sell on LC vs. L/O? - Posted by eric-fl

Posted by eric-fl on March 15, 2001 at 22:07:45:

The main reason to buy a property subject-to, and then resell on a wrap or l/c is to get medium-to-long term cash flow. That’s going to be tough with an underlying loan at 14% in today’s market, even with a marginal buyer. L/O would present the same issues, perhaps even more so, as L/O buyers typically have less to work with than L/C buyers. Of course, you are right, you could make a short-term L/O to offset your cash-flow situation, but if someone can’t buy now, they probably still can’t buy 6 months from now. Only about 50% of L/O ever exercise their option, and when they do, it’s typically 18-24 months or longer from inception. Since this property is a pre-foreclosure, their is presumably not enough equity to make a straight buy and sell possible, else the seller would have already refinanced.

Although I have criticized others on the board for saying “Pactrust” in answer to difficult situations, I think it would be the best solution here, and I’ll tell you why. That rate stinks, but it’s probably not worthwhile to refinance. You need a buyer who will pay over FMV a year or two from now, but it’s hard to get people to do that without offering terms. Plus, you need to get some money upfront and at the end, in order to offset your negative cashflow and make this thing worth your while. You basically need a land contract, but only for a short term, and everything spelled out so you know where the money is. That’s exactly what the Pactrust is, and if I remember correctly, the Pactrust documents even default to a period of 5 years before cash-out. In this case, since you would be offering the tax-writeoff, and all other benefits of ownership via the Pactrust, you could get a higher down payment than a L/O would, which does not offer those same benefits. You could then set the Pactrust to get the lion’s share of appreciation when the property is refinanced at the end of the term. Of course, even this may not be viable depending on the numbers, but it may be worth taking a look at.