When a tenant doesn’t pay, lease option versus land contract: eviction vs foreclosure.

by | Indy Anna, Real Estate Investing, Uncategorized

What happens when a tenant doesn’t pay?  When a tenant doesn’t pay with a lease option versus a land contract: eviction vs foreclosure.

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This is a quick video I made about  a question that came in about dealing with a problem tenant.

Why is it harder to evict someone in a
land contract vs a lease with option?

Here’s the question:

“I’ve heard it’s more difficult to evict someone in a land contract than a lease with option.  Is that true and if so, why?”

It is true, and we are going to cover this in our class today.

While a land contract and a lease option (or a Master Lease or something like that) are both/all tools used to purchase a property based on some kind of seller financing, they are not equal.

Remember there is a hierarchy here are seven different levels of real estate ownership and/or control from weakest to strongest:

Get the Deed.  (something like a “subject to” deal)

Land Contract.  (this is recorded and provides “equity”)

Master Lease with Option.  (this can be a lease option for example)

Master Lease with Sublet.  (this allows you to rent out the property)

Short Term Rental Sublet.  (for deals like Air-BNB and other mini-rentals)

Standard Option.  (not something you will usually use by itself or in general)

Assignable Offer.  (like an option that you can assign or for wholesaling deals)

So today we are comparing the foreclosing on a Land Contract
versus the eviction with a Lease Option…

This example could be a master lease option or a master lease with sublet or any other combination.  The point is that when there are issues and you need to remove somebody from the property you need to have a good reason and a good plan to move forward. 

So a land contract (which can also be called a “Contract for Deed”) is a stronger ownership/control position than a lease option.  The land contract is more legally official or binding.  Meaning that although these methods are used to purchase a property based on the idea of seller financing, one is more official or binding than the other legally.

With a lease option…

This is a contract, yes… BUT…

The title is not able to be insured or the sale of the property officially recorded.  This is a lease, and while it’s structured differently than a rental, it is still a lease scenario.  Then the end terms come into play.

The formal eviction process:

After non-payment with a lease option, the formal eviction process will need to begin.  We have a class filing eviction that I already did so you can check that out for more on the eviction process.

Now for a land contract:

In a land contract, if the buyer/tenant doesn’t pay then this will require much more than the formal eviction process because there will be a foreclosure process that must begin after nonpayment. 

Why a “foreclosure”?

Because this is a hybrid recorded sale.  So the foreclosure process will need to happen and the judgment from the court will be necessary.  This will be a civil case, where the defendant (buyer) will be able to defend themselves. 

Will the buyers actually fight you in court?

The buyers or defendants rarely go to the trouble of appearing in court to contest their foreclosures.  The buyers are more likely to show up in court and fight when the plaintiff is an owner, investor or some other individual as opposed to a bank.

After the due process of foreclosure proceedings, the court will either rule a judgment in the owner or buyer’s interest in the land (property).  This can lead to a few different outcomes, in forms of back due payments being made, eviction taking place, etc.

One alternative to this is contract forfeiture.

This would simply be a forfeit of the contract by the buyer and it would be returned to the seller. 

This may not be upheld in all states for two reasons:

First, more states are becoming sympathetic to buyers left homeless or at least kicked out of a house by contract sales they are unable to afford.  As a result the rulings are often in the buyer’s favor.

Second, (goes along with No. 1), they buyer could lose a lot of money.  This would depend on how much money was put down and already paid over time.  The concern is that this would become a matter of the buyer being ‘forced’ out after significant investment.

The best ways to avoid having to go through a foreclosure and/or eviction:

You always want to require a big down payment, this helps qualify and commit buyers.  You also want to screen your buyers better and help them qualify so that they can follow through and purchase. 

The MOST important step is building and nurturing a great relationship with your buyers.  Many times they will not end up getting financing or buy the house so with a good relationship you can always help them make the best decision regardless of what it means for your house.

Build solid relationships and everything will go well… or at least better.

So those are the basics of a land contract versus a lease option having to evict a buyer tenant versus foreclosing on one.

Here are some legal contracts and paperwork you can download for FREE.

Here is a Land Contract Template.

Here is Eviction Notice that may be required to be sent X days before a hearing is scheduled.  It may also be required to issue as a preliminary to a foreclosure as well.

Here is a Breach of Contract template that can be filed on any contract issue in general.

Here is a Eviction for Non-Compliance that is sometimes necessary or helpful as you outline the specific reason they were required to vacate.

Here is a an Eviction Notice to Quit this is also a “Notice to Vacate Due to Late Rent” and sometimes this can be used with both a lease and/or contract.

You want to have as much legal documentation as possible.

This is why you train your Legal Eagle Team on exactly how they are to execute and perform.  This is also why you want to build a great relationship with your buyer and all of your people. 

Combine a good relationship with the fact that they see how seriously you track and document and everything and you should proactively avoid problems.

Thanks so much!  = )

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