Buying w/ Owner Financing &amp; Selling w/ Land Contract

OP

Rental Property Investor · Pittsburgh, PA · Member since 2015 · 35 posts · 22 votes

5y

@Alex Deacon thanks for your thoughts on the additional insurance considerations; I agree completely.

@Joe Villeneuve this is an interesting approach I hadn't considered. If it helps, the contract in place to buy is a traditional purchase and sale agreement. The only "unusual" thing about this part of the transaction as compared to a traditional home sale is that the owner I'm purchasing the home from will hold the mortgage for 2.5 years. During this time I'll have title to the property and get the all benefits of ownership, including the fast debt paydown on a 0% interest loan.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Originally posted by @Andy Madden:

@Alex Deacon thanks for your thoughts on the additional insurance considerations; I agree completely.

@Joe Villeneuve this is an interesting approach I hadn't considered. If it helps, the contract in place to buy is a traditional purchase and sale agreement. The only "unusual" thing about this part of the transaction as compared to a traditional home sale is that the owner I'm purchasing the home from will hold the mortgage for 2.5 years. During this time I'll have title to the property and get the all benefits of ownership, including the fast debt paydown on a 0% interest loan.

Who will be living in the house before your balloon payment in 2.5 years, and after?

OP

Rental Property Investor · Pittsburgh, PA · Member since 2015 · 35 posts · 22 votes

5y

Hi Joe,

The tenant-buyer will be living there both during and after the 2.5 year term. To use specific dates, if I closed and took title on April 1, my 2.5 year term with the current owner would begin. I would pay him $500/mo during that time. I would also start a lease option or land contract with my end buyer on the same date (or one day later). They would pay me $950/mo. For 2 years and then refinance and get a traditional mortgage, at which point they would pay me the remaining balance of our agreement, take title to the property, and I would pay off the original note from the seller I am purchasing from.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

5y

Originally posted by @Andy Madden:

Hi Joe,

The tenant-buyer will be living there both during and after the 2.5 year term. To use specific dates, if I closed and took title on April 1, my 2.5 year term with the current owner would begin. I would pay him $500/mo during that time. I would also start a lease option or land contract with my end buyer on the same date (or one day later). They would pay me $950/mo. For 2 years and then refinance and get a traditional mortgage, at which point they would pay me the remaining balance of our agreement, take title to the property, and I would pay off the original note from the seller I am purchasing from.

In general, I like the idea of you buying with SF where you get title, then sandwiching to another buyer with a LC or LO. You will have more control with a LO of course.

2 Things- vet your end buyer well. You are responsible for making payments to your seller and for the homes condition.

Have your end buyers' agreement end at least 6 months prior to yours. You need time to arrange payment for the balloon if they can't swing it.

Thanks for bringing up a creative deal. Getting boring around here!

2 Reply

OP

Rental Property Investor · Pittsburgh, PA · Member since 2015 · 35 posts · 22 votes

5y

Thanks @Steve Vaughan! What are your thoughts around rent credits with a lease option arrangement? How much if any should the tenant buyer receive in a credit toward the purchase price for each payment made? In the case of a land contract, I assume the credit would be the principle portion of the note agreement we sign, but I’m less clear on what would be reasonable in a lease option scenario.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Originally posted by @Andy Madden:

Thanks @Steve Vaughan! What are your thoughts around rent credits with a lease option arrangement? How much if any should the tenant buyer receive in a credit toward the purchase price for each payment made? In the case of a land contract, I assume the credit would be the principle portion of the note agreement we sign, but I’m less clear on what would be reasonable in a lease option scenario.

I second everything that @Steve Vaughan said.

As far as rent credits that's a big NO!!! That will just get you into trouble. If you want to give your tenant/buyer the equivalent of it, just subtract what the total credits would have been from the agreed price to buy from you, then record THAT price as the option/purchase price. This way, the end buyer gets what they want, and if the end/buyer doesn't buy, you aren't losing any money.

One very important point. Keep the 2 agreements (lease and option) completely separate from eachother. The LO agreement isn't one contract...it's two completely separate ones. Don't mention the other contract in either contract. You'll regret it at the end if you do. A really bad lawyer will get your LO converted into a Land Contract, which would mean the entire rent payment would get credited towards the purchase.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Originally posted by @Andy Madden:

Hi Joe,

The tenant-buyer will be living there both during and after the 2.5 year term. To use specific dates, if I closed and took title on April 1, my 2.5 year term with the current owner would begin. I would pay him $500/mo during that time. I would also start a lease option or land contract with my end buyer on the same date (or one day later). They would pay me $950/mo. For 2 years and then refinance and get a traditional mortgage, at which point they would pay me the remaining balance of our agreement, take title to the property, and I would pay off the original note from the seller I am purchasing from.

What you are describing, is a Lease Option.

Farrukh Amini

Rental Property Investor · Jersey City, NJ · Member since 2018 · 176 posts · 80 votes

5y

Firstly, lease option or purchase is the technical term for what’s known commonly as rent-to-own, which is a two part transaction, you have a lease contract and then an option or obligation (depending if it’s option or purchase agreement) to purchase contract. It’s basically landlord- tenant situation. I personally do not like this route mainly because of potential successful equitable interest claims that could arise if the optionee doesn’t go through with the purchase and wants their option fee or claim equity.
Selling on Land contract, aka contract for deed is my go-to strategy. It’s a plain and simple sale and in case of default you know that you go to foreclose instead of wasting your time trying to evict. Also, since it’s a sale you are able to collect a bigger down payment while still holding the title.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

5y

Originally posted by @Farrukh Amini:

Firstly, lease option or purchase is the technical term for what’s known commonly as rent-to-own, which is a two part transaction, you have a lease contract and then an option or obligation (depending if it’s option or purchase agreement) to purchase contract. It’s basically landlord- tenant situation. I personally do not like this route mainly because of potential successful equitable interest claims that could arise if the optionee doesn’t go through with the purchase and wants their option fee or claim equity.
Selling on Land contract, aka contract for deed is my go-to strategy. It’s a plain and simple sale and in case of default you know that you go to foreclose instead of wasting your time trying to evict. Also, since it’s a sale you are able to collect a bigger down payment while still holding the title.

Some states have high excise or transfer / stamp fees, so keep that in mind.

Andy, my sandwich strategy would be a lease option. No transfer fees and much more control.

Listen to @Joe Villanueve as to LO construction. No credits other than maybe one at closing as a % like a seller-assist. My closing cost help shrinks the longer it takes the Optionee / TB to exercise. If within 12 months it may be 2%, then 1% months 13-24.

Dennis Wayne

Member since 2020 · 339 posts · 356 votes

5y

Looks like a lot of moving parts on this for one stinking house ! What is the purchase price and condition of the property ? Maybe I missed it but Is the seller setting you up on a mortgage with a balloon or a land contract ?

There’s several ways you can do this if I’m understanding correctly . I would find the least complicated way that still makes sense. One option would be take title in a trust then when you bring the new tenant buyer in you sell them beneficial interest in the land trust ...or you could do a lease option with them for 12 months with 5% down and just reduce the price as a artificial rent credit each renewal as joe teaches or setup a land contract with them and get a 10% down . However you do it get a 5-10% down payment on the price and cover your butt with good contracts ! Don’t do a mortgage note transfer with less than 20% down if you are offering true financing

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Originally posted by @Dennis Wayne:

Looks like a lot of moving parts on this for one stinking house ! What is the purchase price and condition of the property ? Maybe I missed it but Is the seller setting you up on a mortgage with a balloon or a land contract ?

There’s several ways you can do this if I’m understanding correctly . I would find the least complicated way that still makes sense. One option would be take title in a trust then when you bring the new tenant buyer in you sell them beneficial interest in the land trust ...or you could do a lease option with them for 12 months with 5% down and just reduce the price as a artificial rent credit each renewal as joe teaches or setup a land contract with them and get a 10% down . However you do it get a 5-10% down payment on the price and cover your butt with good contracts ! Don’t do a mortgage note transfer with less than 20% down if you are offering true financing

You pretty much summarized everything we've been talking about doing.

OP

Rental Property Investor · Pittsburgh, PA · Member since 2015 · 35 posts · 22 votes

5y

@Steve Vaughan, @Joe Villeneuve - thanks for the input on how to handle rent credits (or lack thereof). That's the one piece that I've been hung up on. That said, I really like the approach of either a) reducing the price or b) offering seller assist at the closing table.

Steven, your point about transfer taxes is a good one, especially because where I live has one of the highest transfer tax rates in the country, to my knowledge (5%). That said, the current owner is adamant about selling it with financing as opposed to doing a lease option; he wants the certainty that he'll be completely free of the property when he retires (at the end of the 2.5 year term). So unfortunately there'll be a double transfer tax hit, but the margin on this particular deal makes up for it.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Originally posted by @Andy Madden:

@Steve Vaughan, @Joe Villeneuve - thanks for the input on how to handle rent credits (or lack thereof). That's the one piece that I've been hung up on. That said, I really like the approach of either a) reducing the price or b) offering seller assist at the closing table.

Steven, your point about transfer taxes is a good one, especially because where I live has one of the highest transfer tax rates in the country, to my knowledge (5%). That said, the current owner is adamant about selling it with financing as opposed to doing a lease option; he wants the certainty that he'll be completely free of the property when he retires (at the end of the 2.5 year term). So unfortunately there'll be a double transfer tax hit, but the margin on this particular deal makes up for it.

I thought you already had a contract with the seller. It sounds by this post there's nothing in writing yet...meaning you don't have one ...yet. If that's the case, before you commit to anything, let me know.

Dennis Wayne

Member since 2020 · 339 posts · 356 votes

5y

One point of interest : Dodd frank act has things about balloons in financing so depending on how that’s structured you need to understand the implications of the deal your making with the seller . If it was me I’d likely use a land trust then sell off some of the rights of the trust to the tenant buyer instead of the actual property sell the beneficial interest - big difference

OP

Rental Property Investor · Pittsburgh, PA · Member since 2015 · 35 posts · 22 votes

5y

@Joe Villeneuve - the contract is in place with the seller. My original post was meant to generate discussion/ideas around rent credits and a lease option vs. land contract with the end buyer, but I think it evolved a little bit! In any case, I will keep this group updated.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

5y

Originally posted by @Andy Madden:

@Steve Vaughan,

Steven, your point about transfer taxes is a good one, especially because where I live has one of the highest transfer tax rates in the country, to my knowledge (5%). That said, the current owner is adamant about selling it with financing as opposed to doing a lease option

I meant a lease option to your end buyer, not from the seller. Another waste of time this was I see.