Hello, Good day to all. I am writing this message in order to clarify my understanding about lease options and land contracts. In addition, I will to understand the circumstances in which one method should be selected than the other.
Lease option- As the investor, you want to ensure that the tenant buyer has no equitable interest in the property. Seller is obligated to sell. Buyer can exercise his option to purchase but is not obligated to purchase.
Land Contract- As the investor, you grant the tenant/buyer an equitable interest due to the investor delegating responsibilities to the tenant such as paying the mortgage, utilities, property taxes and other financial issues that may be associated with the property. In this scenario, the buyer must buy the property upon the termination of the land contract period. Buyer is obligated by contract to purchase.
- When does the investor elect the lease option method over the land contract method?
- What is the contractual terminology to used to describe the monthly payments the investor/seller receives in the land contract scenario? Are these monies paid considered rents or “consideration money” due to the tenant/buyer being able to deduct the interest from these payments on their yearly taxes?
- What is the penalties the investor can implement in the land contract scenario if the tenant/buyer violates his duties to pay mortgage or any other financial obligation?
All responses will be appreciated.
In the past I used lease options often (in fact, I once wrote a book about them in the '80’s). I don’t use them anymore as a seller. Reason: in the event of default, the tenant has an excellent chance of claiming an “equitable interest” in the property forcing you to foreclose (a very expensive and time-consuming procedure). In addition, courts are now defining many lease option agreements as “disguised sales contracts”, and state legislatures, influenced by the realtor lobby, are passing anti-investor laws such as in Texas where lease options are all but banned.
The drawback to a land contract is similar. In addition, the date of sale of a land contract is the date you sign it, presenting a tax consequence for the seller.
Both methods are excellent from a tenant standpoint but present potential problems for the seller.
As you know, I recommend combining a land trust with a triple net lease to avoid these potential problems and to provide asset protection. I hope this information was of some value to you. Good luck.
Thanks mtnwizard for the information. It appears that utilizing a land trust in conjunction with a triple net lease is the optimal investment strategy to minimize risk and loss in the subject 2 deals. In your experience as an investor, are most real estate lawyers comfortable or versed in the concept of the triple net lease? Are there any books I can purchase that can enhance my understanding of the triple net lease? Thanks again for the feedback.
Please don’t base your investing strategy on one person’s OPINION of what works best. My suggestion is for you visit the local library and read up on a few of these different methods, then you can come back here with more detail questions. Plus, you’ll save $$$ that way.
As to a triple net lease, any attorney that does commerical leases (where they are most commonly used) should have a standard form for your review. Or if you know any commerical renters/landlords, maybe you could review theirs for free.
Thanks for the advise, Roger J. I will investigate further methods.
A triple net lease is commonplace. However, in order to provide your tenant the tax and interest writeoffs, it must be combined with a land trust.
Thanks for the information, Mtnwizard.