I’m getting closer to closing my third deal. The seller has a loan on the property and he’s going to sell it to me. We both know that this may violate the due on sale clause, but neither of us are too concerned. His payment on the mortgage has taxes and insurance escrowed. I was going to simply take it over sub2, but he doesn’t want to do that. So, these are my options:
I buy it from him on INSTALLMENTS/LAND CONTRACT, and we record a “Memorandum of Land Contract.” This would, I think, prevent any leans against him from going against what will at that time be MY house. I’ll get title insurance if they let me. Negatives: bank could be mad. More importantly, although he already has a landlord insurance policy, it’s in HIS name. Wouldn’t I have to name myself as additionally insured? I don’t want to get nothing out of the deal in the chance there’s a disaster.
I buy it from him on LEASE OPTION. Insurance is fine. Due on sale clause is fine (well, an option may/may not be seen as a complete sale, but better than land contract, I’d think). But if I do it this way, what happens if he gets a lean against him? Also, I can’t buy title insurance on this either, right?
One big thing you are missing is that neither a land contract deal or lease option give you any owenrship rights in the property and until completion and a deed is recorded in your favor it still belongs to the current owner.
I do not believe that statement to be correct. A land contract does give you ownership rights - just not 100% ownership. Your ownership is subject to other bank liens.
Other than that, I really have to agree with some of the other posts. I would seek legal council to make sure that your financial investment is protected. A few hundred dollars in legal costs could keep you from losing thousands in back payments.
Land Contracts and Lease/Options give the buyer/optionee control of the property without ownership. The title holder cannot further transfer ownership to any other party, without the cooperation of the buyer/optionee, or until the buyer/optionee has abandoned his interest in the property.
Buyer/otionees can assign their interest in a Land Contract, or a Lease/Option, without the title holder’s permission, if the buyer/optionee has negotiated this provision.
However, the buyer/optionee cannot borrow against the property until he controls the property outright. Meantime, the title holder can continue to borrow against the property, and many do, which can undermine the buyer/optionee’s equity position.
That’s one reason why it’s important for a buyer/optionee to stipulate that the seller/title holder cannot continue to borrow against the property while either the Land Contract, or Lease/Option, are in force…
Both the Land Contract and the Lease Option should be recorded. Though this does not transfer ownership, it does encumber the title and records the buyer’s contract interest in the property. If these contracts are not recorded, there may be little recourse down the road.
Personally, I believe a land contract to be a better financial move. This is assuming that the principle portion of the land contract exceeds the amount of the lease option payment (which is in addition to the market rent). You should consider the one that will build equity quicker while considering who pays taxes and insurance.
As professional sellers, we would only record something in either of these cases, IF we were the buyers.
Otherwise, the buyer/optionee does NOT get to record squat.
If the buyer/optionee wants to record something that memorializes our deal, he can find another seller willing to sell on a l/o or LC, and memorialize his heart out.
Meantime, memorializing either a Land Contract or Lease/Option defeats the purposes of both agreements in not creating equitable interest (which becomes the case in some states as soon as the parties sign the docs, but that’s for another post), which require court action to extinguish.
Once equitable interest has been established, for whatever reason, and a default occurs, it forces the seller/optionor into court to gain quiet title, extinguish the options, and otherwise regain possession of the property.
Yes, recording a land contract or an option is in the best interest of the buyer as it creates another link in the chain of title. In the event of a default, quiet title would only be needed if the buyer was unable or unwilling to sign a release of the property.