Land Contract Alternative

3 Replies

Trying to avoid using land contracts in the future as they require foreclosure in my state...at the same time, I want to offer buyers long-term financing that they can count on.  Many of them are concerned that with a typical lease option, they won't be able to pay a balloon in  3 years.

Can you set up an option price and term like this:

1.  During months 1-35, option price shall be $xx,000 minus $xxx rent credit for each month's rent paid

2.  On month 36, option price shall be $yy,000 payable in cash, or payable in 240 installments of $xxx per month if Tenant is current on rent at that time.

This way, if they flake in first 3 years I can just evict them, I don't extend the lease or the option for more than 3 years, and everything is in writing assuring the tenant the ability to pay off the house without a balloon for the term of the note.

I don't mind doing a land contract with them at the end of the 3 years since they've established themselves by then.

Do you think this would be re-characterized as a loan?   Even if that argument could be made successfully, I'm thinking it would take a fairly competent attorney to bring it up, and in most cases where people quickly flake out on payments but won't leave, I'd have good chance of just taking the lease to court and evicting them?

If anyone else has had this situation, I'd be very interested in how you solved it or improved it.

Lease Options are something I’m interested in as well, but after a lot of research and reading, it seems to me that the more your lease option is structured with similarities to owner financing, the more likely a judge is to rule that a tenant has ownership rights and a foreclosure would be required in the case of default. I’m reading SELLER FINANCING AND REAL ESTATE NOTES IN THE DODD FRANK ERA by Terry Lewis and Mark Stein and it’s been very enlightening, although a tough read. 

I agree with @Eileen Murray   - anything that looks and smells like financing could be treated like it.  I don't offer any credits any more to my tenants because of the Dodd Frank act.  Also i would have thought that IN was similar to MI in Land Contracts.  We have basically an eviction to get them out but it just goes a few months longer.  Simple and easy.  

Indiana is a fairly decent state to do owner financing if structured properly. Frank dodds act is what concerns me, I have personally read some of it pertaining to land contracts and don't fully understand what I can and can not do or how many times I can do it.  What I have started doing is habe the buyer sign a quit claim deed releasing the land contract at the time of signing the land contract. I have a section in my contract stating it will only be recording upon buyers default. It only works up to buyer having 20% of purchase price in equity. That's when it is truly a foreclosure process. Hope this helps.

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