Rent Vs. Land contract

5 Replies

Was having a few drinks with my investor friend and he told me that he has shifted to a different strategy and it has been working out for him, wondering what everyone on here thought ;

Instead of renting his houses, he puts land contracts on them. For example his houses are worth around $80-100k,he sells them for 10% over estimate, he asks for 3-5k down 15 - 20 year terms, 6.5-8.5% interest and includes taxes and insurance in that payment. Usually rents his properties for 850-1000$ now he is getting around 730$ but does not have the hassle of dealing with property management, repairs, taxes and insurance. Has an attorney deal with his legal issues if they should arise. Has been lucky, with no foreclosures yet. Has moved half his property inventory over to this ( around 18 houses) and said after a few years will look to sell the notes of the performing assets.

Not sure if anyone else does this, but seems to be a pretty good idea. Interested to hear others thoughts. Thanks!

@George Mill We use this strategy all the time in Louisiana.  Down here we call land contracts "Bonds for Deed".  This strategy is generally used with a balloon payment in 3-5 years so that the buyer/tenant has time to clean up their credit and qualify for a mortgage.  Personally, I would only use this strategy with a property that I do not want to keep long-term.  At some point the property will transfer to your buyer/tenant and you will no longer have a cash-flowing property.  

Because he is essentially a lender and he is getting into volume he probably has some additional regulatory hassle to deal with.  If he is doing mortgages at 6-8% and people are accepting them it could very well be that they are subprime borrowers.  Because why borrow at 6.5% when you can get a loan from a bank at 3.5% for 15 years.  Also why would someone with an overpriced loan also want to buy a house above market value.  If there isn't additional regulatory oversight here there probably should be.

@George Mill,

Great for your investor friend!  But...

IMHO, you'd be better off with a lease with an option to purchase (non-refundable option fee payable to you).  Neither document should mention the other, and no credit for rent should be used towards the down payment.

With a land contract, wrap, or whatever you want to call what your friend is doing, it's all honeymoon until something goes sideways.  Then it's not just an eviction to resolve, it's an ejectment (foreclosure).

@Bob Norton Yes he does not want to keep them is my understanding, but he will have a tough if not impossible time selling them for decent money based on where they are located. He didnt not mention the balloon but that also makes sense

@Aaron K. The people he is selling to are mostly the tenants that have lived there for a few years and pay, and i can almost say for certain that they would not be able to qualify for a loan. 100% sure they would not get 3.5%, as far as overpricing the home not to sure why he would do that, only reason i could see is it would be more lucrative for a potential buyer of the note.