“To Be Or Not To Be” A Landlord or a Lender

“To Be Or Not To Be” A Landlord or a Lender

Becoming a landlord can be difficult and often challenging for the inexperienced. The troubles that can unfold may be costly for today’s landlords. Many homeowners are becoming landlords due to the current market conditions. For some, there seems to be no way out. Homeowners are unable to sell their homes for a price that allows them to break even. Many are being sold at a loss. Bottom line is the inventory far exceeds the demand. We all know that the root cause stems from the lax of lending restrictions imposed by our congress. So what do we do about the problem? We can sit around and complain about the situation or start looking for solutions. One answer my be the “Contract for Deed”.

What is a contract for deed? A Contract for Deed is sometimes also know as a Land Contract, Agreement for Deed, Contract Sale or Real Estate Installment Agreement. This type of document allows the seller to retain the title to the property and agree to transfer the title to the buyer once all the payments under the agreement are made and all other obligations are met. In essence, the Seller finances the purchase and holds the title or deed as security. When the buyer completes the required payments, the seller must deliver valid legal title by way of a deed. During the period of the contract, the buyer makes installment payments on the purchase price and is entitled to possession and equitable title to the property. The seller holds legal title and continues to be liable for payment of any underlying mortgage.

This type of agreement is useful in situations where the buyer is unable to obtain financing from a primary lender.

Generally, the closing costs associated with this type of transaction are usually lower than transactions involving mortgages, banks or other institutional type lenders. A Contract for Deed also allows the seller to gain interest income from the outstanding balance.

Advantages to the “Contract for Deed” are that the buyer pays the property taxes, insures the property and maintains the property. However, the seller has the responsibility to see that the buyer is current on the payments, taxes and insurance. The sellers responsibilities are much the same as a mortgage lenders would be.

If you feel that you would rather be a Landlord than a Lender, then prepare yourself. Generally tenants do not treat property the same as owners. Is your rental property “Tenant Proof?” What type of flooring does the property have? Investing in tile floors throughout can be costly upfront, yet pay off in the long run. Adding insulation to the attic space can increase the life of your air conditioning unit and keep your long term cost down. Providing A/C filters for the term of the lease will insure that they are changed. Hire a landscaping company to maintain the property and add the cost into the rent. Minimize the amount of landscaping to keep this cost down. Don’t be afraid that adding this to the cost of the rent will scare away potential tenants. The opposite is true, tenants want the landlord to take care of the property.

Know who you are renting to. There are many websites the will provide a credit report, criminal background and rental history of your potential tenant for a small fee. When evaluating a prospective tenant credit is important. However, this should not be the only measure by which you select a tenant. Take into consideration what is going on in the real estate market. Many of your prospective tenants are former homeowners who have lost their higher incomes therefore their homes to foreclosure. Their payments started out low, but as the interest and taxes went up they were unable to keep up. These people can be good Tenants. You need to look at the numbers. Were they paying more in mortgage payments and taxes than you are charging in rent? Do they earn enough to pay the rent and their other obligations as well? Don’t throughout the baby with the bathwater. There are nearly 1,000 rentals available in Port St. Lucie. A good tenant can be hard to find, review each applicant carefully.

Best Wishes and God bless

This is NOT intended for the purpose of providing legal advice. You should consult an attorney for legal advice.