@Greg DuPan I can send you a message for the real estate lawyer I use. Their office deals with multiple types of law and they specialize in business, real estate, tax, and construction law.
@Timothy Murphy III I have not had it challenged in court (knock on wood), but the legal structure of a separate lease and purchase option protects you as the owner in the case where a tenant would feel they are entitled to anything what-so-ever. They first and foremost are a tenant, and nothing more. They have purchased an option which allows them to buy the property before anyone else in a designated period of time. That's all. They aren't forced to buy, and they do not become the buyer until they close escrow. My option and lease does not allow for any of the rent to be used and/or applied to a purchase down payment.
The larger amount of risk in these transactions comes when you reach the end of the option and/or lease term and the tenant is not in a position to purchase the property. You now have a tenant who is at risk of losing their option (and their money) and they are living in your house. This can create a difficult situation where you have a pissed off tenant who can create a bad situation.
My risk mitigation in these situations has to always go into deals with people that actually have a chance of buying the property some day. If you are a sleeze-ball and put people into your properties that will never qualify for a loan, then you're asking for trouble. When someone approaches me about doing a lease/option contract on one of my rentals, I set them up with my mortgage broker and have them work together to determine when they think they will have their credit repaired to the point where they can purchase. I then add a year or 18 months to the option as a buffer to protect the buyer (any myself from an angry tenant going rampant in my house). I explain that the longer term is there to protect them and they always agree and understand.
My option contract is structured in a way where they have to have a lease that is not in default. This helps to keep the tenant current, and I'm never worrying about collecting rents. I also put an annual renewal required in the option. The homes that I have done this on are typically $200k+ so I'm not interested in holding a property in option for $3000. If I'm going to lock in a sale price 3-5 years down the road, I want to make sure a few things (1) I'm getting paid to lock that price and (2) the people will actually be able to buy it. So my option typically requires that they put more money down to keep the option current at the start of each new lease-year. Some people balk at this, but if you're serious about buying the property, you're going to need more than a $3000 down payment, and this forces them to save the money (in escrow with me).
Sorry for the long post, but wanted to give all the details.
I don't like land contracts for the 5/20% rule. Stick to lease purchase and make sure your risk is mitigated going in.
