lease w/ option to own, versus seller finance, ..better passive?

Question

what works better all around for a passive income play, least stress, least legal issue?

lease with option to own? (non refundable deposit, higher payments, outsource light repairs to tenant,)

or seller finance? large reasonable downpayment, higher sale price,,,hold note,

why would you do one over the other?

im my opinion, both require forclosure, ...both can pass on some fix-up to new party

(in applying this to me, im holding existing properties, NC and Fl I want to exit out of best stretegy for passive income....and i do existing buys off market, want best duplicatable strategy, rather than flip)

Shawn Ackerman · Answer

@Matt Berklacy This is a great subject and thank you for posting this.  I Prefer Lease options simply because if the payment slow or stop you can treat the tenant like a tenant and start the eviction process.  At-least in WI where I invest.  We put $2,000 deductibles into our agreements  for major capex and do no routine maintenance of the property.  no need for management although we do these at a distance.  You have a built in exit strategy and  you still get to maintain the 27.5 depreciation tax benefit. The icing on the cake is the option deposit.  Man, that makes these deals sweet!!

I've only been on the receiving side of a seller financing(title transfer) deal so holding a note would be new to me.  In my experience the buyer, since they are renting to someone(typically) does not exercise the same amount of care for the property as a lease option tenant would.  With that said, the deterioration of the unit(s) may occur much quicker.  You must foreclose in this case unless you can work out a quiet title situation(not always likely).  The benefit of course is  a larger down payment and the interest rate you are able to charge over time.  You lose the ability to depreciate the property in this scenario which I'm not a fan of.

You are asking the right questions and I'm sure whichever route you go it would be great for you.  All the best.  Remember to persist and you will WIN!!!!!

Pat L. · Answer

@Dennis M.

Up here we can cash flow like crazy. We picked up a duplex for $46K flipped it for $68K @ 12%. Rents were $875 & $700, escrow is $400/month & he still pockets what he considers a lot/month. After 5 years he was ready to refi BUT he was not showing any income so has to wait another 2 years with a positive income stream. After some rehab that same property is now worth about $90K so he did OK on appreciation as well.

We have people with us for many years who go on to buy more from us & just leave the existing financing in place without refinancing & yet they still generate healthy rental incomes.

Dennis M. · Answer

Geez you have gotten some crazy interest on those deals . That’s wonderful but I can’t help but wonder What sane person would pay those rates over that time frame on such transactions

Pat L. · Answer

@Matt Berklacy we hold the (investment) property as contract for deed. With $$$ down. After it's paid they get title our if they exercise option yes we will hold the note as by that time they have paid it down & finished the rehab. We just renegotiated one we bought for $32,000 sold contract for deed for $80k. After 14 years of payments we just re-wrote the balance owed as a mortgage.

Also just sold one cash that had been an old lease to own for 10 years. They put down $7,500 paid $1,300 for 10 years, they maintained it at their expense & paid utilities, then walked away. It became a hoarders mess so glad to unload it. We originally paid $46,000 for it so with the deposit plus monthly payments & now the cash sale we did very very well.

Joe Villeneuve · Answer

First, the lease option doesn't involve a foreclosure...it is an eviction.

Second, you need exact numbers to be able to answer this question.  All you've given us are descriptions of two strategies.

Justin Hammond · Answer

@Matt Berklacy, I prefer lease-options. Getting a bigger down payment isn't as big as a plus for me, since the buyer's are less likely to walk away from them. I like lease options because I can take a $5k deposit (sometimes more), charge slightly above market rent, and give them an option at a price you'd be fine selling at anyways.

I like doing these with properties that need some work. Then it doesn't really matter if they have poor credit, pets, etc as long as you get a decent deposit (doesn't matter if they trash a place that's already trashed).

It's a decent strategy if you have a property on your hands that you aren't in much of a position to spend 20k on.

Pat L. · Answer

They are a great niche...pursue it.

One of ours is a duplex we bought @ foreclosure for $13,500 & did minimum rehab. 'Client' put down $4,500 & paid off $38k @ 13% over 12 years & he just paid us off. We never had to do any maintenance. Had another we got @ foreclosure for $12,500 water pipes froze. Spent $2,500 & did an option $3,500 down, $25,000 @ 9% for 15 years. She paid us off last year. Again we did nothing more to the property.

We just had a couple walk away after 10 years. Another foreclosure $15,000. Client paid $2,500 down then $28,000 @ 12% paid on-time but this year they had to move out of state. In fact over the years we have 'sold' several 3-4 times like this as 'clients' simply walk away.

We have a number of others that actually evolved into mortgage notes @ 12% all going well.

Tim Herman · Answer

@Matt Berklacy lease option you still own the property so it is subject to landlord tenant law. Depending on how you write the contract up you can pass on some of the repair costs. It is rental income and you still get depreciation. You will get a lump sum when they exercise their option.

lease w/ option to own, versus seller finance, ..better passive?

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