I’ve been approached by an individual who is interested in purchasing a property that I will own in the coming days. I will own the property outright (ummm errrr solely through credit cards) and will be (I am now) marketing the property as a lease option. The individual who is interested in purchasing the property would like to do so via a land contract. I’m familiar with lease options and the contracts that go along with them. As I know absolutely nothing about land contracts (minus a blurb or two on the net) could someone point me in the right direction on how to structure one if I decide to go that route? What about down payment? What about interest rate? What about the length? Have a good contract?
You need to speak to a local RE attorney to make sure that you can even do a land contract/contract for deed/etc in your state. Not all states allow them. If they do, then the attorney should either have one on file or be able to put on together fairly quickly.
Many variables in a CFD. Chief among them is that you DO want to collect a sizeable downpayment because a) in most cases, if they stop paying, you’ll have to foreclose, not evict, which can take much lower, and b) a CFD is counted as an outright sell, not an installment sale, by the IRS, if you haven’t owned the property for at least one year. That means that if you “sell” and your net profit would be $20K, you have to pay income tax on that “profit” even if you only actually collected $3K total down and in payments.
Raj, thanks for your response. That helped out a lot. The state that I was looking into is Ohio and I did find out that they do accept land contracts but there are certain stipulations that they like to see within the contract itself.
I’ll ask for a downpayment that is equivalent to about 10% down on this one. That will cover the “rent” for about 7 months in a worst case scenario.
Find out what your laws are. I’m more familiar with MI laws. The max interest rate is 11%. Also, it’s a shorter 3-month foreclosure process for land contract. You should find out both of these things about Ohio. The bare minimum down payment should be enough to cover your attorney and carrying costs for the foreclosure. It’s also common to structure in a balloon payment after 3 years which requires them to refi.
I'll ask for a downpayment that is equivalent to about 10% down on this one. That will cover the "rent" for about 7 months in a worst case scenario.
You are on the right track!
Here’s the problem with a land contract. I got an email last week from a guy in Kentucky. Now follow this closely:
He sold his property on a land contract to Mr. X. Mr. X then leased it to Mr. Y who has been making his payments on time to Mr. X for almost a year.
Mr. X has stopped making the mortgage payments and Old Kentucky can’t locate him, but Mr. X has continued collecting rent from “his” tenant. The Lender is breathing down Old Kentucky’s neck and he is about to go into foreclosure. Mr. Y keeps on paying his rent to Mr. X and is threatening to sue everyone. What a mess! This is why I use land trusts.
Land contracts and lease options create equitable interest for the buyer. They are disguised sales and violate the DOSC. They offer virtually no asset protection, and are not good for sellers. I used lease options for many years and still would as a buyer, but never again as a seller. I know that small investors like to follow the old tried and true methods such as lease options and land contracts, but this is a new age and you NEED asset protection that these methods don’t provide making their use questionable at best. Good luck.