I love creative financing for real estate. But before you leap, you must understand the subtle but important differences, especially how these change the risks that you are taking. A key difference between land contracts and lease options is that land contracts are much riskier for investors…
Land contracts and lease options are both powerful ways to control a property without taking out a mortgage. No credit. No mortgage qualifying. No high mortgage fees.
And… there are other advantages to not using a mortgage like being able to close the deal fast because only the seller and buyer are involved. But…
A Land Contract is Not a Lease Option
I’m talking mostly about what this means to investors but there are also implications for buyers and sellers who don’t understand creative financing.
The phrase “land contract” can sound like we are only talking about raw land. However, real estate is very local and so is the terminology that is used. Land contracts are also known as installment land contracts, contracts for deed, memorandums of contract, real estate contracts, or bonds for title. These apply to any type of real estate. Here, I’m referring to single-family houses. The average home that the average American lives in.
A land contract is where the seller does not receive the full purchase price upfront. This is significant because a new mortgage or all-cash deal does immediately pay the seller in full. The deed to the property transfers to the buyer and the deal is done.
The keyword is “contract.”
A written land contract between the seller and buyer is used to purchase the home (or any other real estate). The contract is like a mortgage except there is not a third-party lender in the deal. The deal is only between the seller and the buyer – no mortgage needed. The buyer makes payments directly to the seller until the purchase price is paid in full. Only after the purchase price is paid in full does the deed transfer from the seller to the buyer.
As an investor, you want to control property without owning it whenever possible. In other words, you want to make a profit but minimize your risk.
As an investor, being the bank for the buyer is high risk. Read on — to understand what investors wanting to control more properties should know about land contracts and lease options.
The Big Advantage of a Lease Option
The big problem for an investor who sells on a land contract is that significant risk continues until the contract is paid off. The seller keeps the legal title to the property until the land contract is fully paid in full. However, the buyer does get “equitable title.” In most states, this means that even if the buyer stops making payments, they have some ownership rights to the property. To protect the buyer’s rights, he or she records the land contract with the county’s register of deeds.
If payments are missed on a land contract, there is no mortgage. That means the seller can’t foreclose on a mortgage. Instead, the seller must go through what is called “land contract forfeiture.” You better know the laws in your state because they do vary when a land contract forfeiture is involved. There are also possible risky legal issues in the U. S. Congressional Dodd-Frank Act.
Not so with lease options and sandwich lease options. There are huge advantages for investors using lease options. You are only granting the tenant-buyer the “option to purchase.” You collect a non-refundable option fee that is about as big as a decent down payment. But the buyer is only entering into a rental agreement until the house is paid for in full. With a lease option, the tenant-buyer doesn’t become a buyer until they take out a mortgage to pay the investor in full.
If the tenant-buyer does not make the rent payments, they are just like any other tenant. There is no land contract or mortgage. No foreclosure or land contract forfeiture is needed. By using the paperwork from the sandwich lease option course, a standard eviction notice is all that you should need to retake full possession of the house.
The difference between a land contract and a lease option is tremendous!
The Even Bigger Advantage of the Sandwich Lease Option
Investors can buy on a land contract, but the sandwich lease option is much better. Buying on a land contract makes you (the investor) the legal owner of the property. As the owner, if something goes wrong, you have all of the legal risks. If the roof caves in or the HVAC conks out, you’re probably on the hook to replace it.
With a sandwich lease option, you control the property, but you don’t own it. You become the middleman (meat in the sandwich) between the seller and the tenant-buyer. Without owning the property or taking full responsibility, you control the property and the deal. You create three profit streams for yourself while minimizing your risk.
You enter into separate lease options with the seller and tenant-buyer. Profit point #1: you pay a smaller option fee to the seller than you collect from the tenant-buyer. Profit point #2: you pay less rent to the seller during the option period than you collect from the tenant-buyer. Profit point #3: the sales price you pay to the seller is less than the sales price you collect from the tenant-buyer.
All at reduced risk by controlling the property without owning the property!
The difference between a land contract and a lease option is like night and day when it comes to risk. You are primarily responsible for creating and managing the agreements. A big part of this responsibility is helping both the owner and seller understand how this creative financing works. Most sellers and buyers are only familiar with one type of financing – taking out a new mortgage. Creative financing is common with investors but not with traditional owners and buyers. As a savvy investor, you understand the tremendous difference between a land contract and a lease option.
You explain how everyone benefits from a sandwich lease option.
And… The Important Difference Between Land Contracts and Get the Deed
Creative financing is the most powerful tool that investors have. Sandwich lease options are the place to start when you want control with little or no responsibility. Land contracts have their place when you want the deed. But Get the Deed Subject to Existing Financing can be the better low/no cost and low-risk method when you are the buyer in the deal.
Get the Deed Subject to… is about taking possession of the deed immediately. Often without making payments to the seller. “Subject-To” real estate acquisition is the process of buying properties that have an underlying mortgage in place. There is a transfer of ownership at closing, but the mortgage stays in place. The investor buys the property “subject-to” the existing financing. Many times, the best financing that can be obtained for a property is the financing that’s already in place!
Advantages of Subject To Existing Financing:
Minimum or zero down—usually less down when taking the deed.
No financing — just take over payments
“Seasoning” is easier proved
Long term capital gains
No income or credit checks
Great ROI (return on investment)
Can buy in IRA’s
Sometimes getting paid to take ownership!
The seller is helped and will thank you!
I’m here to help you understand what creative financing options are best for the deal that you are considering today and tomorrow. Here is what you need to Start Now!
- Your Wealth Building Arsenal.
- Advanced strategies for Buying and Selling with Lease Options.
- Investing In Real Estate with Lease Options.
- Add Personalized Coaching.
- Cooperative Lease Options.
- Expand to Get the Deed “Subject To.”
- Round it all out by Working with Realtors.
By Wendy Patton
For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.
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