Buy on contract?

Question

After reading some old threads, I still had a question about buying on contract.

I'm looking at a rental-- owners are open to selling on contract. Of course I will have to ensure that it is a "buy right" and that I get a good contract written. I think I have a bit of a grasp on the ins and outs of contract sales, but I plan to do more research on here as well as to speak with a lawyer.

Is it reasonable to assume that typical buying-on-contract terms will require less down payment than the 20% or more a bank will want for a conventional investment property mortgage? Obviously the interest rate will be higher with a contract sale, but if I can put down a low percentage as dp, I should be able to lesson my cash output, correct?

I plan to refi once I've rehabbed and rented the property. Any offer I make will allow for a healthy spread between cash outlay on the rehab and ARV, so a cash out refi should be do-able. I'll call my bankers and make sure they are still doing those in my area (just did one this summer).

Thanks in advance...

Steve Crawford · Answer

Both Steves have it.

If you buy on a Contract you name wont be on the deed.  It's called a "contract for deed".....you get the deed when you fulfill the terms of the contract.

For what you want to do the lease option is a much better approach.  In fact, you may get more principle credit with the l/o than then Installment contract.

If you go with a contract.  Make sure you don't have a prepayment penalty.  Make sure you contract is recorded with your County Recorder.  Make sure you are comfortable with the default provisions (get a right to cure clause).  Triple check the late fees.  See if you can procure your own insurance and provide the Seller with a certificate (allows you to shop the price).  Check the property taxes.

Good luck.  You are on the right track to do a creative deal.  Be smart.

Steve Babiak · Answer

Typically, in an installment contract/ land contract/ contract for deed (take your pick, all very similar), you will not get the deed until you have paid the contract in full - similar to automobile purchase.

So, your reasoning for buying on a "contract sale" seems flawed.

Steve Crawford · Answer

In my opinion, either way, you are at risk.  If you invest a ton of money in a property that you dont have ownership of, you are at risk.

You will have an "equitable" interest in either an Installment Contract or a Lease Option (both of which can be recorded with your County).

If your Contract for Deed is a good one, you should be fine.  As far as "case law on the books".............it can help, but it is never dispositive.  Either way, you will end up in Court if a dispute arises.

If the Seller goes BK on you, there are a host of issues.  One that will be predominant, will be that your "interest" is secondary to that of the note holder on the property..... and while they may be happy to let you pick up the Seller's arrerage and finance the property.........they equally, may not.

Steve Babiak · Answer

In some states, a lease with option can give you an equitable interest - so in those states a lease option offers some protections.  But I agree with Scott on contract for deed where even though you do not appear on the deed (just like in lease option), you have better standing with contract for deed.

Now, getting a contract that you can record is key.  Some investors have been "trained" to make recording of the contract a "breach" of the contract ...

Joel NA · Answer

thanks Steve...good advice. I've already located an attorney to handle RE issues if I want to avoid using family.

Regarding your earlier comment about the buyers name getting on deed only when contract is fulfilled, would you agree that buying on contract still gives you more legitimate, legal control as opposed to lease options (as Scott mentioned)? Or do you see the risk as equal in lease option or contract.

I want to put down as little as possible, but I also want to be protected thoroughly from seller's issues/ whims. I'd put down 10% or so gladly if I can ensure that my control of the building flawlessly leads into my name on the deed when I refi.

Steve Babiak · Answer

Make sure you use an attorney who understands Real Estate Law.  You wouldn't have a foot doctor do your brain surgery now, or would you?

Joel NA · Answer

ok Scott... see, that's what I was worried about with a l/o...thanks for the thoughtful reply...

I'm definitely going to have a someone help me with the contract...fortunately I have a couple of lawyers in the family!

Scott Hubbard · Answer

Let's disect this a little bit further.  An LO versus a land contract.

Land Contract will give you an equitable interest in the property.  So, if your considering  a major investment in rehab, I believe this is the better option becuase it will protect you against liens should the seller fail to perform or get into financial trouble.  Most states have case law on the books which would protect your interest should a claim arise against the seller.  It is also recognized by the US bankruptcy court with much case law upholding the vested interests of the buyer.

The LO on the otherhand, depending on your state and many times its case law, may not afford you the same protections.  If a dispute arises between you and the seller your fate may very well end up in the hands of a judge.  This can kill an equity in your deal.  Also Bankruptcy?  Will you be able to effect a sale should the selelr file for BK protection?

In my opinion, if you plan on doing any rehab work, you should check closely with an attorney which financing vehicle best fits your strategy.

In my opinion, LO's are best suited for turnkey where low upfront costs are necessary.  There are not well suited for rehabs.

Joel NA · Answer

thanks for the replies...

Steve...I think being smart in this case means having a lawyer draw the lease option or the contract up and making sure it's tight.

I'm assuming a lease option is a flexible thing and I can mold it to suit the situation with the right know-how. As long as there are provisions for the rehab and the concerns that have been pointed out in this thread are addressed, perhaps the l/o is my best bet.

Joel NA · Answer

Thanks Stephen...

The property is vacant. A lease option sounds like it might be a good idea. I need to read up on those in any case.

I like the contract sale because I want my name on the deed from the get-go. Again, I'll read up on lease options.

Buy on contract?

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