L/O Vs Land Contract In Regard To The DOS Clause
I am venturing into a new area and need advice on structuring this deal. My tenants want to buy the house that they've been renting for a year. They will not qualify for bank financing for several reasons but they have always paid on time, no problems. They want to give me $15000.00 down on a land contract with a payment plan. They also want to make lump sum payments of maybe $5k once or twice a year. I still have a mortgage and I'm afraid that the bank may exercise its DOS if they find out that the property is under a land contract. What if I do this as a L/O? How would that work out? Would the buyer/renter be able to make lump sum payments before he exercised his option? Would making a lump sum payment change the deal to a land contract? Also, is there less chance of the bank using the DOS if I structure the deal as a L/O? I know that there are a lot of questions here. I hope that you understand what I'm looking for. I am mainly worried about the DOS clause. I don't want to end up strapped for cash to do other purchases because I suddenly have to pay off a mortgage here.
There are problems with long term lease options. I believe that any lease with a purchase option, and any lease over 3 years could be considered as a disguised sale, and the lender could accelerate the loan.
It is my understanding however that the same problems do not exist within a land contract or contract for deed. You are still the owner of the property until they fulfill their contract with you, and you are still responsible for the loan. No problem with the lender.
( I have not done this before, so I would encourage you to seek additional advice on this because I could be very wrong.) (It's happened before)
Jeff
Both the L/O and the Contract Sale violate the due on sale clause. Read your mortgage document. Hint: it's usually clause #17.
Most of us don't worry about the DOS. Make your payments on time with good funds. Keep your financial records up to date and your R.E. investments on file with a good loan officer. Then, if the lender should call the loan you will be prepared. I only know of a couple investors (mercifully not me & hopefully not Lufos) who have had the lender exercise the DOS. It can happen, but it rarely does happen.
So, I should just go ahead and have my lawyer execute the land contract and not worry about the bank? Does the tax info change to the buyer after a land contract or does that also stay in the name of the seller? I was told by a lawyer that the tax records will show that the property was transferred and that the bank will see it when they check to see that taxes are paid up to date.
Sandbahr,
Glad to meet you.
If you sell under a Land Contract to your buyer, they do not get the deed until they fufill the terms of the Land Contract. Do not record the Land Contract no need to, just part of selling on a Land Contract.
You are still the owner of the property, so nothing changes as far as the tax records are concerned. Your buyer can claim the interest deductions at the end of the year, since they are paying the mortgage. Unless Uncle is sending out IncomeTax Records to lenders here again no change.
As far as the rest of the world knows it is your property.
John $Cash$ Locke
Okay, so I think I may be starting to get it.
As long as I don't record the Land Contract, nobody knows about it except the buyer, myself and my lawyer? So, I keep the land contract in my safe and when the final payment is made we would record the deed and the land contract and pay the transfer fee. Anything else I need to know about this would be appreciated. It's hard to change your mindset when you've been in retail real estate industry as an agent. You get it sold, you close on it, you all get paid and the documents get filed. Everything transfers over right then and there. It's hard to think about it working another way.
Sandbahr,
Yes, one more thing make sure you collect the payment every month.
Relax, you will be just fine. Creative Real Estate Investor, now u r one.
John $Cash$ Locke
a land trust maybe??
Why would the land trust be better then Lease Option to Buy?
i dont necesarily think its better , depending on where you live, but maybe another option, as the above post suggests concerns of the DOS.. in essence, what locke suggests by a contract or bond for deed will acomplish the same results..exploring the land trust, except louisiana, IMO is just another tool to have. anonomous transaction..
regards-pat.
A land trust wouldnt be better than a L/O but to us it with one. For 1 you hide what you are doing no DOS.
Because I am a licensed broker I can't "hide" from the DOS clause. I am bound by the rules of ethics for brokers. That makes things a bit different for me. If I try to "hide" from the DOS clause I may find myself in trouble for an ethics violation by not telling the bank. Therefore my question is more along the lines of when does the property actually become a sale and is the lease option or rent to own not really a sale until a final payment is made or is the recording of the dead in a land contract the thing that validates the sale, etc? This is an area where I've had no experience. So far I have only sold properties outright. Any other brokers out there have any experience with doing this personally and how have you handled it?
Please verify this although I do not know who you would verify with, probably based on case law - but I have heard that a L/O with a term of two years can trigger the DOS clause. But if you need more than 2 years you can have a 2 year with X or unlimited extentions written into the option contract.
Sandbahr,
Why don't you resign form the board and become full time CREI? Would you do this? Ever?
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So, I should just go ahead and have my lawyer execute the land contract and
not worry about the bank?
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In 96% of the time, DOS is nothing more then a paper tiger. This should tell
you all. It is designed to be available to the bank "in case", much rather
then to regularly disturb the good paying arangements. Pay your mortgage on
time and you'll not hear form bank is what I tend to believe because for
lender to call DOS is reckless specially when the interest rates are as law
as they are now. If you now make your best effort to remind them that they
have the right, that's up to you. As someone sad: "No guts no glory".
But to be certain about all the details, probably your lawyer would know
better the law in your state. And if he/she tells you something else then
what you've heard here, ask her how many similar CRI transactions have
she/he don it?
Just got my license in the mail today! I think that there are some great advantages to having it but there are drawbacks too! Most of my REI is in rehabbing and selling so most of the time it is to my advantage to have a recognizable business name. I also can make some occasional money by seeling or listing other peoples properties besides my own. I am not all that interested in CREI such as sub 2's or land contracts in general. This one just happened to come up this way. When I told my renters that I was going to sell the property they said they were interested. They can't go conventional and having them stay in it and buy it seems like an advantage in this case.
if it would make you feel better call your lender up and tell them your intentions of a contracxt for deed or a lease purchase..they will probably inform you of their " rights " under the contactual DOS clause..it is, by all means, their right, does not- however- mean they will go this course of action..i have taken sub2 AND informed the lender what is happening with no problems..their is always an inherent risk in all CREI but i assume you wouldnt be here asking if you werent willing to take an educated percentage of this risk..
i have found that having two separate contracts of your L/O works best..one is the lease and the second is your option..combined , COULD be construed as an installment transaction and instead of an eviction it might result in the other..equitable interest..i have used single contracts with no problems but prevention in CREI is where ill stay..
as far as the trust goes, the main benefit to me is asset protection but other legal avenues of this powerful vehicle can easily be explored via lease option, contract or bond for deed.. for the real iins and outs of trusts PM william bronchick..good luck and be like NIKE..
regards-pat
Thanks alot Pat. I'm going to send you a PM to discuss this two contract deal with you further.
Quote:Therefore my question is more along the lines of when does the property actually become a sale and is the lease option or rent to own not really a sale until a final payment is made or is the recording of the dead in a land contract the thing that validates the sale, etc?Sandbahr,
I have no direct knowledge of how a lender will view your transaction, or whether the lender will even exercise its right under the DOS clause to accelerate the loan.
However, you might gain some insight into how your lender might view your transaction by looking at the IRS tax treatment involved.
In the specific case of investment rental property you already own:
Leasing with an option to purchase. If you follow the normal structure of the L/O deal, you do not have a taxable sale until the option is exercised.
Selling on a Contract For Deed. The IRS treats a sale on CFD as an installment sale as of the date you enter the contract. It does not matter to the IRS that title remains vested in your name until the contract is satisfied -- you create a taxable sale on the date you enter the contract with your buyer.
As an aside, I talked with a senior loan officer at my bank about selling my rental property on CFD. The bank holds the mortgage on the property. I explained that I might want to sell on a contract for deed, but continue to make the payments on the underlying mortgage loan until the contract is satisfied. I then asked if the bank would exercise the DOS clause in this instance. The loan officer answered (1) How would we know, and (2) Why would we care?