I just bought a condo for 33k. I have a buyer for 45k. I want to give them a land contract. They are giving me 5,000 down. I am going to finance the rest for them with a note that balloons in 24 months.
The buyers know they have 2 years to get their credit act together (not bad credit, just lack of credit) and that they are paying just over FMV. They are aware of the details.
I have a 5 year balloon private 1st mortgage with no wrap around or due on sale restrictions on the property.
So, I know what I want to do I just have never seen the paperwork to do it. Anyone have any examples or experience?
I have heard it called, land leases, land contracts, and wrap around mortgage. I am in CT if that matters.
I don’t know a thing about the laws in CT, but you definitely should become an expert in your laws BEFORE you do a land contract. I don’t do land contracts here in Ohio without a hugh downpayment because the buyers must be foreclosed upon once they meet certain parameters instead of just being evicted. A foreclosure can take months and months and months - all the while you’re not collecting payments.
It would be worth checking with your lawyer to be CERTAIN what the laws are in CT. Generally, I think lease options are a better deal - at least in Ohio.
The buyer wants to have the rights of ownership including the ability to tax deduct the mortgage interest. Assuming default is not an issue, I could use some details about and actual contract.
As PM stated, your state’s laws concerning land contracts (or contract for deed) WHAT actual details are about CFD’s in your state. I could give you examples, but they may be irrelevant in your state.
For example, default is ALWAYS an issue. If you will have to foreclose, then you need to calculate that into the equation. Me, I was able to write into my CFD’s that if the buyers were 30 days late on a payment, the CFD immediately could be voided and it would automatically switch to a month-to-month rental. As a tenant, I could evict. This may or may not be true for your state.
What I do know about CFD’s is that the IRS considers them an outright sell of the property. That means that if you sell it to them for $45K, you have a taxable income of $12K for the year (45-33), PLUS you have income from the monthly interest payments. So, if you plan on going with a CFD, make sure that you get enough of a DP to at least pay your taxes at the end of the year.
Ok, In CT and I am told for this type of purchase, the title does not convey until the mortgage is paid. There is some other instrument that is recorded and gives the ‘buyer’ rights of ownership and prohibits seller from selling or placing further liens on the property. That is the document example I am looking for.
Also, my tax guy says I can spread my 12k gain over the span of the contract. The 5 k down payment the first year and the rest in the second year.
Also, as far as default. I spoke to 1 REI (one of my lenders) that welcomes default. He keeps the large deposit from the first sale and gets another when he re-sells. That’s his legal money if he needs it.
Yeah, I know, then there’s the condition of the place. These are condos, I’ve done a couple of rehabs now and they are not so hard to put back together.
On the lighter side… about lease options. I tried to market lease options here. Whew, people just didn’t get it. Some (many)thought they would just own the place after the lease period is up… you know, not have to pay anymore.
I blame those furniture rental companies for that mentality.
Sure pay me 4k a month rent on a 650/month apartment. You can own it at the end of the lease term.
The title does not convey to the buyer until the terms of the contract are met, hence the name Contract for Deed. The best thing that I can tell you here is to either go to your local library and pull off copies of your state’s laws and standard contracts. If contract for deed (or land contract, or similar) is valid in your state, then they should have something on it. Or you can call up a local RE attorney and ask about it.
As always, go with who you trust, but your tax guy is wrong. If you have not held the property for at least one year, then the IRS will consider a CFD an outright sell and will expect taxes for the entire expected profit, in your case, $12K.
If people do understand the L/O in your area, then you can either explain it better, or market it differently. Rent-to-own, owner financing, financing options available, rent with option to buy are all various ways to market the same technique.
I know almost nothing about this subject but i ve to agree once more with PM: i believe a lease option protects better the seller.
If you go this way, i remember what my attorney said to me once:
Don´t make one single contract: instead make two separate ones: one for the lease and the other for the option;
Never give an option right away, instead make a preliminary agreement on giving an option after a period when your tenant-buyer show you good payment habits.
Don´t listen to me with much attention, instead go and talk with a very good attorney on the subject.
Definitely want to speak with a local RE attorney to make sure that your forms/contracts are legal and valid in your state.
As far as the option agreement goes, have them sign one upfront. Option fees are non-refundable (or can be set to be so) and the money is yours to do with what you want as soon as you get it, whereas security deposits, you must refund and usually keep in an escrow account.
To protect yourself from having a one year option with a buyer that you had to evict, you simply link the two agreements together. For example, my option agreement has something to the effect of "Buyer has entered into a lease contract, dated the same date as this agreement. If at any time during the term of this contract, the lease is voided for any reason, including eviction, then this option agreement shall immediately become null and void.