Residential Leasing

[KLaw]

I have a home that I've been renting /leasing to the same family for the last 10 years. This was my 1st land contract. The home is in Indiana and I've been in Ohio for the past 7+ yrs. They signed a 10 year lease. I don't even think that long of a land contract is legal and I have no idea why I made a 10 year lease. The lease is about to expire and they are unable to obtain financing to purchase it.

As I draft another land contract, is it typical to ask for another deposit? The initial deposit - 10 yrs ago was about 5% of what the cost to purchase the home was. What's the rule of thumb for the monthly increase for this next contract? Also, this contract expires 10/1/14. Any advice or questions are definitely appreciated. Thanks.

@SteveO and @CashFlowDepot and any others - thoughts? Thanks.

 

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[lleone]

@KLaw

Normally, you would take the land contract and amortize it based on the interest rate they are going to pay you to figure out how long it should run before the home is paid off. If not, how much did they pay off of the home in the last 10 years? That would give you the remaining balance that is still owed. From there you can calculate (or back into it based on current lease amount) how much longer it needs to run by using an amortization schedule (they are online everywhere). That would be the nice guy way of doing it.

If the contract required a ballon payment at the end and they are now not able to obtain financing, technically you can keep the 5% deposit and all the payments and they are considered in default. That would mean you can have the house re-appraised for any appreciation, ask for another deposit and create a completely new contract. They are basically starting as if they were new people coming to the deal for the first time. That's pretty crappy for them, but maybe the answer is somewhere in between.

As for the 5%, there is no rule, so you can definitely ask for another 5% (it's normally 10% anyway) especially since you don't even have to keep them on.

As for what the increase should be, I would make it based on at least 1 to 1.5% above the current mortgage rates (see bankrate.com or similar site) since they aren't really qualified for a bank so you are entitled to a premium for taking on the additional risk.

I'm not a lawyer, but I do think certain states (Ohio, I thought did, but not sure about Indiana) have restrictions on land contracts, so you may want to check that out.

Based on the ten years they put in with you, I would tend to try to do something closer to the first option above and be a nice guy about it. The ten years should count for something.

 

[CashFlowDepot]

With a 10 year tract record, it would be good if you could try to work things out with the current occupants.

You should write a new contract at the current market price and get a new deposit. 5% would be reasonable.

With 10 years to clean up their credit, what have they done to accomplish this? Are you sure they can't get financing?
You might have YOUR mortgage broker run their credit to see what loan programs are available for them if you would prefer to get cashed out.

But before you do that, you should consult with your CPA to see how a cash out/capital gains will affect your taxes for this year.

 

[SteveO]

You have a land contract with the other party? My understanding of a land contract is that it is a form of purchase as opposed to a lease. What does the contract say?

Sorry for the late response.

 

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