Real Estate Deal #2: Lease or Land Contract?

General Real Estate Investing
1

Hello,

I am completing my first real estate deal, selling 8 unit apartment building which I bought 4 years ago during financial crisis. Made all kinds of mistakes with it, coming out of it even or maybe small profit mostly due to the fact that I bought it at good discount.

My second investment will be small SFH, local, and I would buy it with cash. I’d have about 50k to spend.

I am debating between leasing it or selling it on land contract. Land contract seems such a beautiful set up where seller gets to be a bank, looks almost too good to be true.

In your experience, what is percentage of land contracts default by the time balloon mortgage is due? What are some of the critical issues I need to consider when getting into land contract deal?

Thanks,

Alex79

2

I don’t think knowing the percentages of default are going to be meaningful for you as applied to a one-off situation like yours.

I mean, you’ve got one deal. Anything could happen. And anything might happen. It depends on your qualifying criteria; your marketing expertise; your negotiating skills; and how well-constructed your documents are.

Otherwise, there’s not enough critical mass of deals to worry about the rates of default.

A better question would be, “How to I get a defaulted buyer out of my house?”

The next question might be, “What’s the best way to get the highest price, the biggest down payment, and the shortest payoff period?”

The answer to the 2nd question might help you eliminate the need for an answer to the first question.

Buyers with big down payments, and something to lose, are way less likely to default.

The easier your qualifying process is to overcome, the more likely you’re gonna sell this house more than once. That is, take it back, and sell it again. Just saying.

The great thing about Contract For Deeds, if your state doesn’t regard them as an equitable transfer of interest (delivery of the deed), is that a default makes the CFD an equivalent to a lease agreement, and if the defaulted buyer/tenant doesn’t move out, you can “simply” evict the deadbeat.

The laws covering defaults on CFD’s are DIFFERENT in every state. You MUST know how your state treats Land Contracts, otherwise, you might end up having to go to court to get your house back, instead of simply evicting a non-payer.

3

The laws covering defaults on CFD’s are DIFFERENT in every state.

You MUST know how your state treats Land Contracts, otherwise, you might end up having to go to court to get your house back, instead of simply evicting a non-payer.

Indeed a javipa says…some states do not allow them…period. They say the buyer is getting nothing for his $$$ and will make you pay it all back plus interest.

INDEED investigate what your state statutes say about CFD.

4

Well, I think any state will ‘allow’ a CFD, it’s just that they don’t all recognize these installment contracts the same way.

For example in California, you can sell using a CFD, but you still have to go to court to get your property back in the event of a default. You can’t just evict a defaulted buyer using a CFD.

That would be the reason simply to use a standard Deed of Trust in California, or any state that considers a CFD to represent a transfer of equitable interest (delivery of a deed).

This shouldn’t be confused with the effects of the SAFE ACT statutes. This is a different issue.

BTW, the SAFE ACT should be renamed as the “PREDATORY BORROWER’S ACT.” The SAFE ACT is anything, but “SAFE” for anyone offering seller financing to “iffy” borrowers.

Meantime, only predatory borrowers are ‘safe’ with the SAFE ACT.

The credit-challenged buyers are SCREWED after 2013. Nobody in their right mind is going to finance credit-challenged borrowers/buyers after the SAFE ACT kicks in.

Why? Because, if/when a seller finances one of these non-SAFE ACT qualified buyers, and the buyers default on the loan, these “iffy” borrowers/buyers are given the “right” under the SAFE ACT to demand all their money back, including their down payments.

IT’S MEAN AND STUPID for the government to both punish, and push out of the market, honest borrowers who can’t qualify for conventional financing.

The SAFE ACT again, just creates a “predatory class” of borrowers …out of thin air, that makes it too risky, if not impossible, to finance anyone with bad credit.

Barney Frank, Christopher Dodd, and all the other Marxists, and enemies of free market capitalism, can go rot in Hell (said in the nicest way possible, of course).

There IS a way around all this crap, of course.