A contract for deed enables the seller to obtain a better sales price and the buyer to become a homeowner when they can't qualify for a traditional mortgage. A draw back for the seller can be that it takes years to receive all of their money from the sale when they offer a contract for deed.

Contract for Deed - Structuring the Sale

Variations to contract for deed sales commonly occur in the terms and conditions of the contract. Rather than the boilerplate contract used by traditional lenders, almost anything can go into a contract for deed.

Contract for deed sales almost always have a balloon payment at a future date

The area of most interest to both seller and buyer is usually if and when a balloon payment becomes due. If the property is an investment property, the seller may offer to carry the contract for deed until the full purchase price is paid in 20 or 30 years. However, most sellers want their money sooner than that. A contract for deed may require the buyer to find alternative financing in as little as 2 years or it may be 10 years. Most contract for deed arrangements fall somewhere in between.

Circumstances of the buyer often have to be taken into account when determining the balloon payment of the contract for deed. If the buyer has a bankruptcy, the soonest they are likely to qualify for a traditional loan is not for at least seven years. Same thing for a foreclosure. However, a short sale might qualify in as little as two years.

Another issue of high interest to both the seller and buyer in a contract for deed is the interest rate. The seller is entitled to a higher interest rate than a traditional lender offers. With risk, comes reward. Buyers should expect to pay 8% and up as interest, although traditional rates are hovering at historical lows around 4%. This relatively high interest rate is something that can entice sellers to set the balloon payment farther in the future, so they collect the high interest rate for more time.

Contract for Deed - It's All in How the Contract is Written

Contract for deed arrangements favor the seller more than the buyer. As holder of the first mortgage, the seller retains the right to foreclose on the property if the buyer defaults. Unless the buyer completes the full terms of the contract they risk losing the property.

One thing the buyer is smart to insist be included in the contract is the requirement that the seller signed deed be held in escrow by a third party. This allows the deed to be recorded with the county in the event the seller cannot be found when the buyer completes their contract obligations. Also, the original deed for contract should be recorded with the county to put the world on notice that the buyer has an equity interest in the property.

An important clause for the seller to have included in the contract for deed is what happens if the buyer cannot obtain traditional financing when the balloon payment comes due. Laws vary from state to state but it can be difficult or impossible to foreclose on a buyer that is current with their payments but can't obtain a new loan required by the contract for deed. Besides, for most ethical investors, doing so would be morally wrong. The way most contract for deeds handle this is with a payment escalation clause. The interest rate can go up. Or the length on the mortgage can be shortened from 20 years to 15. Something changes when the balloon payment is missed to cause the buyer to pay more and motivate them to find traditional financing.

Be sure to sign up for the FREE eBook and FREE Video training today at WendyPatton.com.

If you've had financial trouble that damaged your credit score, rent 2 own is still possible once the financial problem is behind you. The Rent 2 Own Program can be a win-win for the buyer and the seller.

Rent 2 Own is the Seller's Option in A Buyer's Market

Rent 2 own is the program sellers are turning to because they can't sell their property in today' very slow market. Homes sit on the market for 90 or 120 days without an interested buyer making an offer. It's definitely a buyers' market and you should take advantage while prices remain down. Prices will go up, they always do.

Landlords and real estate investors are more sophisticate when it comes to understanding what it takes to succeed in this down market. They have come to understand that offering seller financing through the Rent 2 Own Program dramatically increases their chances of selling the property. When buyers can't get financing, the way landlords and investors sell properties is by offering seller financing, affectionately known as the Rent 2 Own Program.

Rent 2 Own Get's Buyer's the Home They Want While Prices are Low

As the buyer, you have the option to buy at any time up to a predetermined date through the Rent 2 Own Program. You can rent the house for a month, six months, or two years. You have a set price you can buy for up until the date your option to buy expires. With the rent 2 Own Program, the buyer is in control. You set the purchase price today with an option to buy in the future. If the house value rises, you'd be well advised to exercise your option. If the market value of the house decreases, you're not locked into buying. As the Rent 2 Own buyer, you have all the upside and none of the downside.

Rent 2 Own Program has many benefits for the buyer:

• Full control of the home. You can learn if there are maintenance issues or if your family is a good fit with the home before fully committing to buy.
• The buyer is able to live in the neighborhood to see if they like it without committing to staying there long term through the Rent 2 Own Program.
• The Rent 2 Own Program can be your ticket to getting your children into a better school district.
• Credit problems and difficulty documenting income are not obstacles to owning a home with the Rent 2 Own Program.
• Grow equity in the house before you buy it. Often, a portion of the rent payment is credited towards the down payment or equity in the home when you exercise the option.

It's a win-win because the seller benefits as well:

• The seller has a tenant with a vested interest in keeping the property in good repair.
• The seller has rental income to cover the mortgage and maybe a little more through the Rent 2 Own Program.
• Opening to a market of buyers with less than stellar credit dramatically increases the number of possible buyers.

Both buyers and sellers can make lemonade out of this difficult real estate market with the Rent 2 Own Program.

Rent 2 Own is where buyers and sellers meet for a win-win deal.

Please leave comments or ask questions below.

I looked at approximately 15 homes and made offers on 5! As an investor, it's highly unusual to find that high of percentage of houses to make offers on in that short of time. It just goes to show how hot the current market is for investors. The rent to buy market is just as hot!

Start Your Rent to Buy Program Today!

Rent to Buy Deals on the MLS

Here is one deal that I found this weekend - right on the MLS!

$34,000 - brick home with 3 bedrooms, 2 baths, basement and garage. It has good schools and in an all brick area. It is NOT in the hood or in Detroit at all. I can rent this home for around $1100 per month or do a rent to buy for around $99,000. So? Why am I not doing more of these rent to buy deals? Great question! I am kicking myself right now, as I haven't done enough rent to buy deals lately.

But I'm back in the saddle both doing my own deals and sharing with students and readers here on my blog. Just as I thought, this is a great time to be investing. It's a buyers' market with the added benefit of being great to rent or flip houses with a rent to buy program.

Might be a Round Trip With This Rent to Buy House

I also put an offer in on one for $27,000 that I sold about 7 years ago for $132,000. Imagine doing so many deals that you start to buy back your old inventory . I could sell that one on a rent to buy contract for close to $100,000.

So you might ask, "Why would someone sell it to me for that low price?" Cash is the secret weapon in today's market. Very few buyers can make all cash offers. Distressed sellers want to sell now. They could accept multiple offers for considerably more than my offered but their chance of closing the deal is slim.

In today's market, the seller has two big challenges when it comes to a financing contingency. First, lending standards are so tight with banks that most people can't qualify for a loan. That's part of the reason there are so few buyers in the market. Of course, most realtors require a buyer to prequalify before they'll spend time showing houses.

So, you would think the buyers in the market would make a similar low ball offer to what I made and the seller would accept the higher of the two, knowing the other buyer is prequalified. Nope, cash is still king. When you can buy with cash, you can run a very profitable rent to buy program.

You see, those with a financing contingency need to have the house appraised. Lender appraisals are like the loan standards. Appraisals are very conservative now and some even assume the market has not found the bottom. So again, the financing contingency is not a sure deal for the seller.

On the other hand, my all cash offers have no financing contingency and don't require an appraisal. And there's no lender anywhere in the deal. It's just me and the seller. We can close the deal in two or three days if the seller needs to get out that fast. And I can move on to my next rent to buy deal.

I hope several of my offers get accepted. I'm excited to turn them into rent to buy deals.

I also have a Realtor team if you want one of these rent to buy deals yourself - let me know. There are enough out there for you also.

Great webinar on how to buy defaulted paper.

Tuesday – December 7 – 4:00 PM?? EST http://www2.onlinemeetingnow.com/register/?id=952960bab1?
Wednesday – December 8 – 9:00 PM EST ??http://www2.onlinemeetingnow.com/register/?id=e393315064

I look forward to seeing you there!

Question:
Hello Wendy,
I spoke with a prospect this morning. I have had several conversations with her and she and her husband both really like the idea of lease optioning with me. It is my goal to find the right person as quickly as possible. She is very excited.

Now the numbers. She worked for the county where the house is (and where she lives) and helped develop their website. So, they looked at numbers there are trying to find out what neighbors have sold their houses for. I have run the comps for the area. Only one house within a 1/2 mile has sold recently and it is only 16yrs. old, as opposed to hers which is 36 yrs old. Within 1 mile, houses within her age range have averaged to $174K. I think she is looking at getting $170K. Her monthly PITI is $1375. I have attached the Profitability Worksheet I used for this to determine if I could give them what they want. If the terms are right for both of us, I think the deal could be really good. I have put in the worksheet a $500 rent credit for myself because they have owned the house for over 12 years, so they have some equity to work with.
One question: does the Tenant Buyer usually get rent credit? I had been told from someone I could not give rent credits to the tenant buyer because they would want to be building equity in the house and because they did not own it, they couldn't. Is that true? Do you give your tenant buyers rent credits?

By the way, I told you on the phone yesterday that I have had a great time developing a relationship with her very quickly. I told her up front that I was helping a friend find a home, but this home was too much for her, and it is. But I asked her if she would still be interested in Leasing it to me with an option. I explained to her that you are a fellow investor and are teaching me about Lease Options, so if I can't answer a question, I will ask you for help. She is a very nice, hard working woman and I have to laugh. She thinks this is such a great idea, she said, once I learn it, she might want me to teach her how to do this!

God is good and has a way to bring a smile to my face. Thank you, Wendy for your webinars, phone calls and emails. I feel blessed to be working with you and can see the work will pay off. You are, by far, the best coach/mentor I have had!

Answer:
Yes you can give your tenant buyer option credits. I do with sandwich lease options or my own properties that I sell on a lease option.
I think if you can do very long term and make the numbers work with the $500 credit a month, then maybe a sandwich lease option would work, but I would like to see you get a contract in place with her for the 174-175k and keep 4-5k which would still net her what she wants to make (170k). Take your profit of the 4-5k now, since you shared with me you need the cash now!
I hope that helps.

It turns out that properties of all types (residential, land, commercial, even apartment buildings) can be foreclosed for a reason other than a delinquent mortgage.

My guest at this Thursday's seminar is going to explain how this is possible, how YOU can profit from these pre-foreclosures almost immediately and why these foreclosures usually have NO MORTGAGE!

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Missed it? turn in to the replay

Answer: If you are not a Realtor, then you will need to get a Realtor to work with you to get comps (comparables) for the properties you are considering investing in.    How can you make an offer without that data? You must know what a property is worth BEFORE you buy it or before you offer on it.

Here are some ways to get that from a real estate agent:

1)  Offer to pay for comps pulled - each time or a deal that if you buy something on the MLS you will go through them.  Talk to the real estate agent and work out a win/win.

2)  Become a real estate agent. There are so many advantages to this that you might want to consider doing this anyway, but if you are not now, what can you do?

Find an agent that wants to work with you.  Call a local office to see who is interested, OR go to your local real estate investor group and find a real estate agent there.  They will know exactly what you will want and need.

The advantage to securing your own financing is you need substantially less money out of pocket, at least initially.  In this case you are not giving the builder a deposit of 10 percent to 20 percent.  Your actual out-of-pocket costs can be exceptionally low.  Some lenders may allow you to finance your project by lending you a high percentage of the home’s projected appraised value when completed.  This can substantially decrease an investor’s down payment costs.

As an investor with limited funds available, this can provide you with a substantial saving; however, when you obtain your own financing, there are additional risks.  The first risk is interest payments.  A typical construction loan will have an amount of interest charged by the lending institution to pay for construction costs.  Some lending institutions may allow you to roll these interest costs into your overall loan.  This will minimize your out-of-pocket exposure on the transaction.  However, should the construction period run longer than expected, which happens very frequently, you might incur additional interest costs or lender penalties.

The next risk is additional building and materials costs.  If the builder runs into additional costs, such as higher than expected site preparation costs, increased impact fees (taxes), or unexpected increases in building costs, you can be sure these costs will be passed on to you.  So although securing your own financing will have lower intial costs, it might be offset by higher carrying costs during construction.  Always keep reserved funds in place to allow for the unexpected.

The third risk is responsibility.  When you secure the financing for the property, the ultimate responsibility for paying that loan is on your shoulders.  The bank expects that loan to be paid no matter what happens.  If you select an unscrupulous builder, who either fails to build, or takes far longer and incurs far more costs to build than originally projected, the bank will still hold you accountable for that loan.

Key Advantages to Construction-to-Perm Loan

• Less money out of pocket
• End loan is already in place
• Savings on closing costs

Excerpt taken from Making Hard Cash in a Soft Real Estate Market, Chapter 15, Pages 153-154.

Once you have approved a tenant for your lease option home; all you have to do is draft the paperwork and have them sign it all.  You need not give more than 12-18 months to the buyer on an option. This timeframe is most often enough for a good option tenant to get a mortgage.  If at the end of the time period they just need a few more months or they want to extend, it is your option to decide if that is what you want to do.    This is when you can also renegotiate.   Maybe the homes in that area appreciated more than you expected, then you would want to extend, but increase the purchase price somewhat.  You could also ask for another $500-3000 option fee, to extend the option.  You can also raise the rent slightly.   There are times I have given my tenants an extension for free, because of circumstances.

For more information on How to Qualify a Buyer  you can check out my book Investing in Real Estate with Lease Options and Subject-to Deals.