Buying w/ Owner Financing & Selling w/ Land Contract

18 Replies

Hi everyone,

I have what might be a basic question for the creative finance folks out there, but I appreciate the help in advance.

I have a contract in place to purchase a home from an owner who has offered to finance the property at 0% interest for 2.5 years. He's going to accept $500 monthly payments for 2.5 years until he retires, then I'm going to pay him the balance at the end of the term. This will be a straight owner finance situation where I will take title and he will hold a note, which will have a balloon payment at the end of the term. On the other end of the transaction, I have a buyer who is willing to put down a sizable down payment and make a monthly payment of $950 for 2 years, then pay off the balance at the end of the term. 

My question is this: what is this best way to structure the transaction with the end buyer? Would it be a rent to own agreement, lease option, or land contract? I'm curious to hear the pros and cons of each. The second part of my question is how to handle the payments from the end buyer (i.e. does a portion of the payment get credited toward the purchase price)? Or how would payments work with a land contract, which I understand to be more like owner financing, except I will retain title to the property until the end of the term?

Thanks for your insight!

@Andy Madden from what I have heard from other attorneys, a lease option is the best method. Unlike a mortgage you can take back the property much easier and wont have to do a foreclosure. Also you should make sure the person holing the mortgage for you is aware that you are renting out the property. He also may want to be additionally insured since he has an equitable interest in the property. I have a few good RE attorneys in the Pittsburgh market that would help you structure this and keep everything legal.

Originally posted by @Alex Deacon :

@Andy Madden from what I have heard from other attorneys, a lease option is the best method. Unlike a mortgage you can take back the property much easier and wont have to do a foreclosure. Also you should make sure the person holing the mortgage for you is aware that you are renting out the property. He also may want to be additionally insured since he has an equitable interest in the property. I have a few good RE attorneys in the Pittsburgh market that would help you structure this and keep everything legal.

 Probably correct.

However, it depends on the specific contract that's in place to buy.  Is it an option contract or a Land Contract?  It sounds like a Land Contract.

If I was structuring this from the beginning, I would establish the original contract with the owner where the buyer was an LLC. This way, I could sell the LLC, or sell an option to buy on the LLC, with the buy contract as the LLC's asset. This way, when/if the end buyer does buy the LLC, the original buyer of the property remains the same...the LLC. The same would hold true if the end buyer executes the option to buy the LLC.

This original buyer as an LLC works even better if the structure between the REI and the end buyer is a Lease Option. The added Lease gives the REI an added income stream from the spread between the $500 payments to the current owner and the Lease Payments from the end buyer.

One more bonus. Since the end buyer would inherit the original buy agreement between the REI/LLC and the owner, the end buyer wouldn't need to get any financing/loans.

@Alex Deacon thanks for your thoughts on the additional insurance considerations; I agree completely.

@Joe Villeneuve this is an interesting approach I hadn't considered. If it helps, the contract in place to buy is a traditional purchase and sale agreement. The only "unusual" thing about this part of the transaction as compared to a traditional home sale is that the owner I'm purchasing the home from will hold the mortgage for 2.5 years. During this time I'll have title to the property and get the all benefits of ownership, including the fast debt paydown on a 0% interest loan.

Originally posted by @Andy Madden :

@Alex Deacon thanks for your thoughts on the additional insurance considerations; I agree completely.

@Joe Villeneuve this is an interesting approach I hadn't considered. If it helps, the contract in place to buy is a traditional purchase and sale agreement. The only "unusual" thing about this part of the transaction as compared to a traditional home sale is that the owner I'm purchasing the home from will hold the mortgage for 2.5 years. During this time I'll have title to the property and get the all benefits of ownership, including the fast debt paydown on a 0% interest loan.

 Who will be living in the house before your balloon payment in 2.5 years, and after?

Hi Joe,

The tenant-buyer will be living there both during and after the 2.5 year term. To use specific dates, if I closed and took title on April 1, my 2.5 year term with the current owner would begin. I would pay him $500/mo during that time. I would also start a lease option or land contract with my end buyer on the same date (or one day later). They would pay me $950/mo. For 2 years and then refinance and get a traditional mortgage, at which point they would pay me the remaining balance of our agreement, take title to the property, and I would pay off the original note from the seller I am purchasing from.

Originally posted by @Andy Madden :

Hi Joe,

The tenant-buyer will be living there both during and after the 2.5 year term. To use specific dates, if I closed and took title on April 1, my 2.5 year term with the current owner would begin. I would pay him $500/mo during that time. I would also start a lease option or land contract with my end buyer on the same date (or one day later). They would pay me $950/mo. For 2 years and then refinance and get a traditional mortgage, at which point they would pay me the remaining balance of our agreement, take title to the property, and I would pay off the original note from the seller I am purchasing from.

 In general, I like the idea of you buying with SF where you get title, then sandwiching to another buyer with a LC or LO. You will have more control with a LO of course. 

2 Things- vet your end buyer well.  You are responsible for making payments to your seller and for the homes condition. 

Have your end buyers' agreement end at least 6 months prior to yours.  You need time to arrange payment for the balloon if they can't swing it.

Thanks for bringing up a creative deal. Getting boring around here!

Thanks @Steve Vaughan ! What are your thoughts around rent credits with a lease option arrangement? How much if any should the tenant buyer receive in a credit toward the purchase price for each payment made?  In the case of a land contract, I assume the credit would be the principle portion of the note agreement we sign, but I’m less clear on what would be reasonable in a lease option scenario.

Originally posted by @Andy Madden :

Thanks Vaughan! What are your thoughts around rent credits with a lease option arrangement? How much if any should the tenant buyer receive in a credit toward the purchase price for each payment made?  In the case of a land contract, I assume the credit would be the principle portion of the note agreement we sign, but I’m less clear on what would be reasonable in a lease option scenario.

 I second everything that @Steve Vaughan said.

As far as rent credits that's a big NO!!!  That will just get you into trouble.  If you want to give your tenant/buyer the equivalent of it, just subtract what the total credits would have been from the agreed price to buy from you, then record THAT price as the option/purchase price.  This way, the end buyer gets what they want, and if the end/buyer doesn't buy, you aren't losing any money.

One very important point.  Keep the 2 agreements (lease and option) completely separate from eachother.  The LO agreement isn't one contract...it's two completely separate ones.  Don't mention the other contract in either contract.  You'll regret it at the end if you do.  A really bad lawyer will get your LO converted into a Land Contract, which would mean the entire rent payment would get credited towards the purchase.

Originally posted by @Andy Madden :

Hi Joe,

The tenant-buyer will be living there both during and after the 2.5 year term. To use specific dates, if I closed and took title on April 1, my 2.5 year term with the current owner would begin. I would pay him $500/mo during that time. I would also start a lease option or land contract with my end buyer on the same date (or one day later). They would pay me $950/mo. For 2 years and then refinance and get a traditional mortgage, at which point they would pay me the remaining balance of our agreement, take title to the property, and I would pay off the original note from the seller I am purchasing from.

 What you are describing, is a Lease Option.