Tuesday, January 8, 2008

Lessons Learned about Buying Foreclosures and Selling on Land Contract

By: Ralph Marcus (Mark) Maupin
Today’s questions are several. Can you buy a house in foreclosure and resell it on a land contract (Contract for Deed) or lease option to the person losing it? Can you buy a home on a new mortgage and resell it on a land contract?
It is very common for someone in foreclosure to ask someone to buy their home out of foreclosure and resell it to them on a land contract or lease option. Does it seem ok to buy a house out of foreclosure for $100,000 and then give the person who was foreclosed on a one year lease option for $130,000?? In my world, the answer is no! If you are in front of a judge, if it looks like a duck, walks like a duck, and acts like a duck, it is a duck. The interest earned on this transaction is 30%. If this is declared an equity loan, the optionee can use usury as a defense against you. The result could be high legal fees, and a loan re-computed to zero interest. You are also subject to penalties by law. A better solution to the above situation would be to do a lease option for this person on a different property if you feel that he is credit worthy.
What is the proper way to resell a house in which you have purchased on a new mortgage? It has been a very common practice to sell the house on a land contract. The new owner then continues to make payments on the mortgage without the mortgage company knowing that there as been a land contract sale. I recently attended a Continuing Education class for realtors and learned that this is in violation of Federal law. Rather then sell the property on a land contract you might consider doing a lease option on the home thus not being in violation of any law. You should be aware that mortgages generally have acceleration clauses that allow them the discretion to declare the mortgage balance due if you violate their prohibitions against re-selling or doing conveyances that look like a sale.
Disclaimer: Real estate investing by nature is risky. You can win, lose or break even. We cannot guarantee a profit or loss. We do not provide legal, accounting or contracting advice.
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