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Thread: Land contract vs Lease option

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    Default Land contract vs Lease option

    What's is the difference between these two?

    In the Lounge someone mentioned a former actor got caught up in a land contract gone bad. This guy said he couldn't get finanacing because he is a self-employed comedian whith a fluctuating income. He said this deal was the ONLY way to get a house.

    A friend of mine bought a home through the lease with option to buy but it looked like the price was inflated too much to be worthwhile.


    Does anyone know if either of these is a good way to buy for dancers and other tipped employees?

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    Default Re: Land contract vs Lease option

    That certain comedian you were talking about most likely had piss poor credit. People with good credit don't have the problems he complains of. If you are a little short on the down payment and would like to build up to that (for whatever reason), sure you could use that. But, it would just be better to live in a place where you could afford the full rent plus put enough money for a down payment away.

    The price is inflated to project for future sales of the property. So, if the house is worth $250,000 TODAY and you sign a Land/Lease contract with the current owner saying you'll purchase the house in 2 years, then the price of the house would be "inflated" to the estimated value of the place in 2 years.

    But, it comes down to this. Someone who has really good credit, but not a lot of money would be able to do a lease/land contract fairly easily provided that they begin making money to account for by the time they need to get a loan on the property. If they have shitty credit and sign a land/lease contract...they're just going to lose money because when the 2 years is up, they will need to go to a lender and purchase the house. X amount of dollars of their rent payment is put into escrow and used as a "down payment" on the house. If the contract falls through due to poor credit/bank denial...they lose all of that money.

    Land/Lease contracts CAN work...just make sure your lawyer reads everything and you still have to make sure that your credit/income is sufficient to buy the property later on down the line.

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    Default Re: Land contract vs Lease option

    So, it's not an inevitability that if you're self employed you MUST go that route? I kinda figured there was more to the story. He paid $200,00 so far on it and call me crazy but I think he should have gone for a $300,000 home instead of $450,000. He's on the road for god's sake. He doesn't need a Mc Mansion.

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    Default Re: Land contract vs Lease option

    It's all about image.

    There are conforming loans that you can get with being self-employed. Getting a lease/land contract is not the only option. The only thing I can think of is that if he had enough to pay the payments, his credit was not good enough to do a full out purchase. Which is a completely different story.

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    Default Re: Land contract vs Lease option

    "As a self employed individual you may run into problems when it comes to mortgages and mortgage lenders. Mortgage lenders like to verify income before approving loans. For the self employed, many mortgage lenders want to document two years of self employment income. The documentation requested is usually your self employment tax returns. Some lenders count the profit you claimed on your taxes as your average income. Some may use a portion of your deductions and write offs; other mortgage lenders may not count this as income.

    If you don’t have two years of tax returns to document your income with you can find lenders who are willing to accept two years of bank statements to verify your income. The advantage of using bank statements is you can document a higher amount of cash flow than is evident on your tax returns.

    If this is not an option for you there are lenders that will allow you to state your income on a low doc or no doc mortgage loan. This can be helpful for people who are paid on a commission basis or are recently self employed."

    http://ezinearticles.com/?Mortgage-R...oyed&id=172152

    A land contract is a contract between the buyer and a private seller of a property, wherein the seller holds the title or deed to the property until all agreed upon payments have been made in full. With a land contract, a down payment is usually made, then equal monthly installments are paid until the property is paid for or until a balloon payment is required. A balloon payment is a lump sum of money that is due at a specified time, in this case at the end of the course of monthly payment. There are alot of risks with land contracts. Mainly because the seller holds the deed to the property until the balloon payment is made. As Venus said it is best to have a lawyer involved.

    Even if you have a good credit score, if you have what looks like shakey work history, getting loans can be a problematic with some lenders. I have a friend who is a construction worker. He worked every year on differant projects but often had months in the year he was out of work. He did not have the same employer year after year. Some lenders would not touch him. Even though he had a great credit score and down payment. It all really comes down to the lender.

    In the comedian's case his work history looks shakey because of the nature of his profession. Also he was purchasing a home for $450,000 home. Taking those two issues into consideration, even with a good credit score, he would be considered risky for such a large loan.

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    Default Re: Land contract vs Lease option

    If you have been following interest rate trends both in the USA and around the world, two changing trends are clear. #1 is that interest rates have risen a couple of % above the historic lows of a few years ago, and prices of necessities like energy, insurance, and taxes have also risen, which causes lenders to seek more assurance that a buyer can actually afford to keep making their mortgage payments if the price of these necessities continues to rise. #2 is that the past paradigm of 'real estate can only go up in value' has been disproven for the most part, which causes lenders to be more demanding in regard to their own 'security' - i.e. that enough down payment money is being put in by the buyer such that the lender won't be left with a loss should the buyer default and the bank be forced to auction the property (for less money than the buyer still owed).

    It ultimately doesn't matter that much whether you are self-employed or a 'corporation' employee these days, because frankly the job security of 'corporation' employees isn't all that secure anymore. What DOES matter is the lender can be satisfied that the would-be buyer is financially responsible (which requires documentation of a more or less regular income, plus having spent that income to pay bills on time etc.). What DOES matter is that the would-be buyer can put enough equity into the purchase (i.e. a 20% down payment) such that the lender isn't going to be at immediate risk should real estate prices decline say 10% in the future.

    What also matters is that the would-be buyer has reasonable prospects for their future income following along the same lines of past / present income ... which is probably the toughest criteria for typical dancers to meet because, when a 30 year mortgage is involved, lenders understand that a 50 year old dancer's prospects probably won't be anywhere near the same as they are today at age 20. Thus lenders are often much more receptive to dancers who are seeking shorter terms i.e. the odds of having a 15 year mortgage approved are probably 4 times better than a 30 year mortgage for the same amount.

    As to the lease with option to buy, given the changes in the economy this now shifts risks to the buyer ... because the contract signed today for a house appraised for say $100,000 obligates the would-be buyer to pay that same $100,000 price two years down the road. It is possible that, with the changing real estate market, two years from now the market price for that house may have fallen to say $90,000. Thus today many property owners are beginning to see lease with option to buy contracts as a means of 'covering their own butts' by locking in a high sale price for their property to the lease option buyer that they can't actually get from a 'clean deal' buyer in today's market. The downside for the would-be buyer of course is (as posted by others), in a declining market the buyer could be forced to decide whether to overpay $10,000 on the purchase price of a property, versus forfeiting say $5,000 in accrued 'down payment' lease money to walk away from the deal, two years down the road. In either case the property owner wins and the would-be buyer loses.
    ~
    Last edited by Melonie; 07-08-2006 at 06:28 PM.

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    Default Re: Land contract vs Lease option

    I think it has to do with the amount or protections a consumer has on a land contract versus a mortgage (based on where you live), as that is the true risk of what is an essentially alternative financing device.

    First of all land contracts in my opinion or more likely to be used in an era of tight credit and is a version of seller financing to facilitate a sale. My father used one in the mid 1980’ in an era of high interest rates on mortgages to a lady who wanted to buy his lake lot, but who worked in a shoe factory. She had a good employment history, but income growth wasn’t there. On the other hand her work was steady and in demand for high level men’s and ladies shoes then still made in the usa.

    I told him to go ahead, and the contract which ran for ten years was paid exactly as agreed. It was somewhat of a character judgment lending risk, and his judgment was correct.

    A land contract is also more inclined to be used as part of a seller financing of a small business that may include a small commercial location, or where the seller wants a continuing stream of income but where the loan is secured by assets as collateral.

    At present time interest rates are still quite low for residential and the market remains liquid. (I expect things to be different a year from now.)

    Your consumer rights tend to be governed by the philosophy and collections law and procedures of the state you live in. Of most important is philosophy.

    Wisconsin and Minnesota believe citizens are hard working and make mistakes. Evil banks are then held at bay by state law with longer redemption periods on foreclosure. Land contract borrowers are given much of the same protection as mortgage borrowers are.

    Illinois is quite different and more mirrors Texas in its land contract collection laws in application but now philosophy. In Illinois there is a long history of pay your debt or get your knees broken. (Wonder where that came from?) It is very pro lender and that extends doubly so to land contracts. The last time I looked (which was ten years ago) Land contracts were given none of the protection of mortgage note borrowers, and your property could be taken for non payment on missing just one payment, even if you were
    Within one or two payments of totally satisfying the contract and paying off the debt.
    Obviously in Illinois you are taking a large risk in borrowing on a land contract.

    In Texas a debt is also a debt, and it is a matter of honor to repay. Non payment may get you shot or punched out at least in the olden days. Thus the application of repayment is similar to Illinois while the philosophy is different.

    I was surprised to find that in Alabama and somewhat in Tennessee that there is a state equivalent to bankruptcy that does not run through the US court system but runs throught the state court system.

    It is a matter of society and family honor to repay the debt. The state courts do not discharge the debt, but do assist in a legal structure of the repayment plan that has force of law.

    I think this southern approach is where George Bush got his idea of restructuring the US
    System. It is based on a difference in philosophy as the ultimate basis for the change in the recent US Laws.

    Please find out what the state laws in your area are, because it could really knock you for a loop if something goes wrong depending on where you live.

    Bottom line: What is the societal old time philosophy of debt repayment where you live?

    That will pretty much give you the idea of what could happen to you if things go wrong.

    I wonder if debtor prisons will make a comeback as a matter of philosophy in about a year or two when things get tough? Might call it the Debtor Reform Collection Act of 2008 . Call the prisons mandatory residential debt education centers.. Outsource the administration to private collection agencies, and build and mange the re education centers by out sourced private companies. An an investment they might be a good deal, as long as you aren’t a “student” in one.

    Yes reality can be changed by re labeling defined terms.

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    Default Re: Land contract vs Lease option

    wonder if debtor prisons will make a comeback as a matter of philosophy in about a year or two when things get tough? Might call it the Debtor Reform Collection Act of 2008 . Call the prisons mandatory residential debt education centers.. Outsource the administration to private collection agencies, and build and mange the re education centers by out sourced private companies. An an investment they might be a good deal, as long as you aren’t a “student” in one.

    Yes reality can be changed by re labeling defined terms.
    We already have 'debtor prisons' for bankrupt former homeowners ... but they're called 'public housing projects' !!

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    Default Re: Land contract vs Lease option

    ^^^^^Ha ha! I had to laugh at that! Sad but true.

    Niceguy you got the essence of what I was wondering. I wanted the nuts bolts and philosophy. I'm interested in NJ, NY, PA, SC and Texas laws. Those are all the places I love and could see buying property. I know NY has the best renter laws and NJ has the crappiest. Anybody have advice for what site I can begin searching?
    Last edited by Optimist; 07-09-2006 at 11:07 PM.

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    Default Re: Land contract vs Lease option

    Sorry, no idea as real estate is governed by state law and land contract collection application starts with philsophy and is then embedded in the state law. (My opinion.)
    Which philosphy wins depends on the power of insurance companies and banks in your state on loan collection and repossession foreclosure adminsitration applied details. ("The devil is in the details.")

    A compromise state position on Land contracts is (again my opinion) a calculation in the state law wherin some states allow the Land contract to be governed by residential mortgage collection and foreclosure procedures when the contract amount (stated amount in the land contract which can be higher or lower depending on how it was written to facilitate the equity sale price), (debt amount owed) is paid down to over 50% of the amount due. Obviously the Law of Equity should (but no longer does in many states)
    click in when someone has after long struggle paid a land contract down to only 50% owed.

    The land contract would then be treated as a residential mortgage with all the protections in northern states of redemption laws, and some increased protection in southern states.

    The 50% application is in my opinion a good compromise on Land Contract collection procedures and you should find out about it in the state you are doing the contract.

    In general, unless you are dealing with a reputable party (many selelrs these days aren't)
    and its a residential house not commercial, don't do a land contract. (Again my opinion.)
    Example:

    Assume things get tough on the coasts and value falls and hosues sit much much longer on the market. Selling to you on a land contract is a good way for the owner to not lose the property in foreclosure, and then screw you on repayment and easily take the property back
    when the market recovers in four years.

    (He or she avoids the loss of a typical sale with mortgage, with increased chance of making you default.)

    Why do business with someone like that who will know too muchb ab out you and yoru business. They are not your friend. However as a stripper you should know that already.

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    Default Re: Land contract vs Lease option

    Quote Originally Posted by Optimist
    I think he should have gone for a $300,000 home instead of $450,000. He's on the road for god's sake. He doesn't need a Mc Mansion.

    Around where I live, an extremely mediocre one story 3 bedroom house with like, 5 sq. feet of yard in a congested suburb runs for about $600,000.

    Did I mention I want to get out of SoCal?

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    Default Re: Land contract vs Lease option

    Holy Crap! In Dallas you'd get a ranch for that money! Even on the East coast you'd get a massive place.

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    Default Re: Land contract vs Lease option

    Quote Originally Posted by TifaRae
    Around where I live, an extremely mediocre one story 3 bedroom house with like, 5 sq. feet of yard in a congested suburb runs for about $600,000.

    Did I mention I want to get out of SoCal?
    My brother will never leave SoCal, but he did say that housing prices were absolutely ridiculous...and that's just the "average" price...that's not the price for a "remodeled" or "excellent condition" home.

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