Epic Real Estate Investing - Contract for Deed vs Lease Option | 1029

Episode Date: May 25, 2020

One of the questions that Matt has received fairly frequently in the past 8 weeks is whether an investor should use a lease option or an agreement for deed. Therefore, in today’s episode, Matt shares what is the difference between them and which one you should use more often! Tune in and find out more! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep listening. If you want it faster, visit R-E-I-Aase.com.

Here's Matt. Hey there, Epic Investor. It's Matt Terrio from Epic Real Estate, where we show people how to invest in real estate with an emphasis on retiring early. This is the Epic Real Estate Investing Show, and if this is your first time here, glad you found us. Kick off your shoes, put your feet up, stick around, stay at home, make yourself comfortable. If you like what you hear, by the way, make sure you hit the subscribe button before you go so you don't miss a fantastic episode.

and if this is the first time here, I just happened to be on the road traveling, had to get out, partially opened up our state, and I headed it out and just went on a long road trip with the family. Stopped at a few diners and ended up at my mom's house in Oregon.

And we're out in the woods. The reception isn't the best. The acoustics aren't that great. So I am in the car actually recording this. And so if it sounds, Like I'm in a car, that would be why. But this is probably the best base of all that's available to me. I guess I could go out in the woods, but there's all kinds of noise and distractions around.

Anyway, if this is not your first time here, then you know this happens every once in a while. And welcome back and thank you for sharing this with your friends and family. I love that about you. All righty. So, Creative Acquisition April that we went through. Let's see, we are now in May, getting close towards the... the end of May. So we've been kind of, we started in the beginning of April going through all these different creative acquisition strategies. And, uh, it really resonated with a ton of you. More than I

really hit, would have imagined when we started. I thought it was a timely message, but I had no idea how much, uh, that message was, um, needed by people and welcomed by people and get them really excited about real estate. And, you know, especially how creative financing, strategies can generate greater deal volume. It gives you many more opportunities to create the cash flow that you're looking for. It really helps manage your risks because, you know, you've got less money down and you're kind of protected from overpaying in that way. And the hedge against inflation is real. And particularly as we've had these stimulus packages released and the quantitative easing, if you don't know what that is, it's when the government

it just prints money out of thin air. And what that does is it devalues the dollar. So if you have a bunch of money in the bank, that money is becoming worth less and less, which means it will buy less. But when your money is held and you're controlling it through real estate, real estate is a great natural hedge against inflation. So it's preserving the buying power of your money.

So that's real. And then it just creates a bunch more options. You know, the more property that you control, after all of this that we go that we're going through and you know just the more options you're going to have to establish and bolster your financial position and if done correctly i really believe if you take advantage of this next 12 months i don't know how long it's going to last so i'm not i don't have any inside information there i'm guessing just like you but i really believe there'll be enough opportunity that if you just buckle down and focus for the next 12 months you will never

have to work again uh you you certainly could get stinking wealthy during this this time but that shouldn't really be the goal. Not initially. I think we all aspire to get there someday, maybe sooner rather than later. But really the first milestone for yourself is to create financial freedom, to create enough residual income, enough passive income to cover your expenses and just cover your livelihood. And that is available to each and every one of you. That doesn't take a whole lot of money for most people.

You know, the median household income in America is about 50 grand, I think between 45, $50,000. And for most parts of America, that would cover your livelihood. Even if you, you know, you got a spouse and you got a kid or two, and you're not into lavish lifestyles, but just, you know, maintaining. That's a very achievable goal, very achievable. All right. And so that's available as we move into this new shifting market.

How far it's going to shift? We don't know. but the opportunities are already revealing themselves. That was it last Monday or so. I ran down a giant list of all the people that were doing amazing deals inside of the epic community. As a matter of fact, I did not have a plan on talking about that, but this Friday, this last Friday was even better.

I don't have an internet connection. But this last Friday was probably double, so I can't pull that up. Shoot, should have planned for that. But anyway, those things happened. But I think it was last Monday, I ran through like, I don't know, five or six great deals that people had posted inside of our follow-through Friday. It's a post that we do every Friday where people share their wins inside of the Epic Facebook community.

And this last Friday was probably twice as many. So the whole point there being that the market is revealing opportunities and people are taking advantage. And people that have struggled for a while are actually making progress and doing deals right now. So that's really been the message from the very beginning. If you are thinking this virus or this economic shutdown is the time to stop real estate, uh-uh. It's the time to get in. And those that have persevered and pushed through this are seeing the fruits of their labor right now.

And it's not too late. You can do it too if you've been standing on the sidelines waiting. But yeah, it's just so the creative acquisitions thing, it's working. And you all really, you've picked up what I've been putting down. And, you know, even feeding back to me all of my own catch friends. You know, it's, we've got to, the name of the game is control. The tactic is creative financing. And it's really been great.

It's not a money problem. It's an idea problem. It's really been pretty fun. So I've received so many questions that I just, I can't get back to them all. You know, I put inside of one of our little, we have a little auto sequence that goes out with emails when you first, you know, come over and you kind of pick up one of our free things that we have demonstrated out there. the big hot one lately has been the 21 creative financial terms.

And those are kind of the building blocks of these creative financing structures. And you can get that at epicbreakthrough.com. But in there, we have like a little automated sequence of just letting you get to know us and just sharing information about us and what we do here at Epic and how we help people. And if that's a good fit, then it gives you an opportunity to work with this even more. But in that sequence, there's a, there's an email that's, it's an automated email and it asks, you know, what do you really need? What do you need most right now?

And that email, the responses, those come back to me directly and I respond to them personally. So the response that you get from that is not an automated response. I just like to understand what you all want, what you need and how I can help them in the very best way. But those are really coming back in an abundance. I'm trying to get back to them all, but it's been really tough. I was doing really good for a few weeks and now they're starting to pile up, stack up.

But anyway, that's been fun. And what I've decided to do, though, to help everybody get their questions answered. I did this at the beginning of quarantine. I didn't, and I'm going to decide to do it again. And just carve out a couple hours this coming Saturday, May 30th, to hop on Zoom, and just walk you through these creative structures,

answer all of your questions from all the stuff that we've been talking about the last couple months. And if you got deals, bring those. We'll analyze those. And just hang out. And, you know, let's get things done. And I'll share a link or two during that training if you want some extra help. But this won't be a promotion.

It won't be a pitch or anything like that. Just helping you navigate some of this stuff. So if you'd like to join me, you can go to creative financing 2020.com. Creative financing 2020.com and register. And then I'll see you this Saturday. be a nice intimate setting of just discussing real estate. And if you've got some deals, bring it to the table and we'll discuss your real estate. All right?

So one of the questions that I've received fairly frequently over the last eight weeks or so are people wanting to know which creative strategy to deploy first. Or how do you know which one to do? Because there's been so many of them, right? And this one in particular keeps coming up. It's what's better to use, a lease option or an agreement for deed. right? Because they seem to solve similar problems, at least on the surface they do. But what's the difference in which one should I use more often? So let's talk about that today. You know, many investors, most investors are generally familiar with the concept of a lease option. And the agreement for D, they kind of get that. And if you've been listening to last few weeks, then you definitely've got probably greater knowledge than most on those two subjects. But many investors, they kind of confuse the two of what they should do and how they should use them. And this is going to help you understand. you know, where the pros and cons are, the tax and illegal benefits and the practical issues

between an agreement for deed and a lease option. All right. So let's start with the agreement for deed. Also known as an installment contract, the contract for deed, installment land contract, bond for deed. You'll hear it referred to in many different ways. But it's all the same thing. It just kind of depends on what territory or market or what state you live in. Some of those are legal terms. Some of those are just the jargon of the area. But they're all the same thing. agreement for deed or contract for deed are probably the two most common that you'll hear. And so it's an agreement where the buyer makes payments to the seller in a very similar fashion that you'd buy a car with financing.

Right? The seller, just like the car dealer or financier, holds legal title to the property or the car as security for the buyer's monthly payments. Now, the buyer still, however, holds what's called equitable title. And just like when you make the final payment on a car, the seller delivers to the buyer legal title, right? So unlike a traditional mortgage where you get legal title and then make payments, with an agreement for deed, you make payments and then get legal title. But while making those payments, you still get equitable title. So what's equitable title?

Well, it gives you the right as the buyer to live in the property, to fix it up, to add to it, to rent it out, to use it, right? You just get all the benefits of its use. Equitable title that also gives the buyer all of the benefits, really of not just use, but of ownership. However, since the buyer does not have legal title, he cannot use it as he or she, can't use it as collateral for like a home equity loan. At least it hasn't been the case. That's been one of the big distinctions about the agreement for deed. but it is a contract and a contract does have value and some lenders will still see the contract as collateral for a loan. It just kind of depends who you're talking to. Probably your traditional avenues might not see it that way, but in some states, yes,

and in some of your more non-traditional lending options, they will. It's a contract. And if that contract is assignable, it's definitely got value and can be used as collateral. most cases no. All righty. Uncle Sam, speaking of Uncle Sam, will generally treat an agreement for deed as an official sale. So which means the buyer gets all of the tax benefits of ownership too. So not just the right to use the property, but all the tax benefits. And the payments of being making the payments of interest, those makes those deductible by the buyer as mortgage interest, the same way that probably maybe on your personal primary residence when you get to deduct that.

Same thing with this. And then once sold, the seller cannot claim depreciation or any other tax benefits of the property. So they all pass over to the buyer. The seller cannot longer claim the depreciation or claim any of those tax benefits. Now, if the buyer defaults on the agreement and the seller exercises their legal option to take the property back, the tax code treats that transaction as a foreclosure. Okay. so it can still impact you in that way.

And the legal process technically, this is the thing, like the, when you get a mortgage, that's a real estate transaction. With an agreement for deed, it's a little bit more classified as a business transaction. So in the event of default,

the legal process for an agreement for deed technically is a breach of contract as opposed to a foreclosure. But I wish it was a clear cut. I could just give you an absolute easy answer. Because it's just not entirely clear in every state. Some statutes clearly spell out the process and let you know exactly where each side stands,

which is, you know, there's a little bit more involved than in a typical eviction, but not nearly as complicated and consuming as, say, you know, an all-out foreclosure. In most states, you won't find a clearly laid-out process. So the courts just kind of deal with it on a case-by-case basis. all righty so that's the agreement for deed how it works and how it's viewed and treated by uncle sam and the legal system so that's your agreement for deed let's look at the the lease option now

which is really two things a lease and an option an option to purchase and we've talked about both of those what a lease is and what an option is over the time here on the on the show recently but a quick summary a lease is a contract for the use and possession of the property where a landlord-tenant relationship is created. So it's not technically a buyer-seller relationship yet. It can be if the buyer chooses to exercise the option, but entering a lease option, it's more of a landlord-tenant relationship.

And an option to purchase, it's a unilateral agreement. It's a one-way street. One side is obligated. The other side is not. That's what unilateral means. Where the seller gives the buyer the exclusive right for a fee, to buy the leased property at typically a fixed price somewhere in the future before some pre-designated time in the future. And the lease option, it differs from the agreement for deed in the sense that

it is not a sale yet unless the buyer exercises the option. It doesn't use a purchase agreement, which is a bilateral agreement. So there's a unilateral agreement of an option and then the bilateral agreement of the purchase agreement, a two-way street, meaning both sides have responsibilities in that contract. And the sale part of an option, like I said, it's unilateral. A bilateral contract legally obligates both the seller and the buyer, whereas an option only obligates the seller. There's the technical definition right there at the difference. So the buyer doesn't have to buy yet has the right to. In a contract, once they have passed the contingency period, they basically have to buy it now.

All right? So the seller still maintains, however, legal title and all the tax rights, a legal owner is entitled to. And if the seller defaults on the lease, it's typically just a simple eviction for the seller to get their property back. All righty, so that was a lot, right? So which is better? The agreement for deed is more of a sale. The lease option is not a sale.

But the buyer still controls the price. property and basically has the same rights, but there are some fine distinction. So which is better? Which one should you use? Well, the lease option, like I said, it's a landlord-tenant relationship until the purchase is complete. The agreement for deed is a sale at the inception of the agreement. So which strategy is better?

Well, an agreement for deed or lease option, you know, is the time-honored correct answer for all real estate questions is that's what's making these emails so difficult to respond to is because. Some of the questions I think that are being sent to me seem like nice, easy, simple questions. But as you know, the answer to all real estate questions is it depends. Right. It's just, it just always does. It depends on the situation.

And it depends on the person's circumstances. And it depends on your intent. Like, what are your goals? What are you looking to accomplish? And I think a great deal depends on whether or not you're buying or selling. There's the first kind of line in the sand on, one's better, I think. I prefer the greater degree of control. I'd rather have as much control as possible. And that shifts on whether or not you are the buyer or the seller, right? So if I'm the

seller, I'm going to lean toward the lease option before the agreement for deed. I'm going to lean towards the lease option because as the seller, I still have title to the property and it's not a sale, and I still all the tax benefits. I'm still the owner. So I kind of lead toward this or that when I'm the seller. But if I'm the buyer, I'm going to lean towards the agreement for deed before the lease option because I still have all the control, but now I have so many more benefits of ownership. Okay. But the exception really has to do with whether or not you do actually want to sell or buy the property. Or if you just want to make some money on it and don't really care too much what happens at the end of the agreement or at the end of the period. You know, for example,

An agreement for deed sale will allow you to get more of, say, a down payment from the buyer since it feels a lot more like a sale rather than, say, a rent-to-own type situation. But you are almost assuredly going to be permanently parting ways with the property. So if you do really want to sell the property and need more money up front, the agreement for deed as the seller might make more sense to you than a lease option. and higher-priced neighborhoods, higher-priced properties, luxury houses, pretty houses. The rents may not cover your underlying mortgage payments, so an agreement for deed sale can allow you to collect interest payments, which are generally more than you could collect in just plain rent. Okay. But wait, a property sold via agreement for deed is an official sale in Uncle Sam's eyes.

Thus, you cannot use a 1031 tax deferred exchange on a property sold by an agreement for deed. when the buyer pays off that debt balance. And the entire balance paid on the contract will be due as capital gain, which can become a huge tax bill if you have a low basis in the property. And a buyer that defaults on an agreement for deed is generally more difficult to get out of the property, especially if you end up in court to do so. So now you can kind of see where the it depends really comes into play, right? you know, because I really prefer the lease option when I'm selling, but there's a lot of benefits

depending on what my goals are by using the agreement for deed. So if one or any of those things, you know, sound appealing or don't sound appealing or could cause a problem for you or make something better for you, you know, then maybe the agreement for deed is the right thing, but then maybe the lease option might be the way to go when selling. And all of that is vice versa when you're buying. I know that it's a lot here, right? I feel like I feel like my hands are tied behind my back, so I have a tough time talking without being able to draw pictures. But I'm articulating it. I'm not drawing anything, so there's nothing to see.

And hopefully you're kind of making sense of all this. But really what it comes down to is you got to look at it at a deal by deal basis. And that's why I'm always telling people to not paint themselves into a corner by identifying with any one investment strategy. Like if you call yourself a wholesaler, stop doing that. Or if you call yourself a fix and flip or a subject to expert, like just stop identifying yourself with an exit strategy. Don't call yourself a wholesaler. It's so short-sighted or a fix-and-flip or a lease-option investor or a wholesaling lease-option

investor. I mean, there's so many different categories and people just kind of adopt the title or the identity of whatever course they're taking, whatever program they're in or whatever mentor they're following. You've got to really look at each deep. as it comes and make it work for your goals at that specific time. You know, each deal comes with different upsides and different downsides. And your circumstances and your needs, your own personal needs, your professional needs,

in pursuit of your goals, those change daily. You might be big on cash one day. And then the next day you're short on cash. So depending on what deal you have available to you, just based on that alone could determine whether I'm going to hold this or if I'm going to flip it or if I'm going to flip it fast or if I'm going to fix it and flip it slow, right? So try referring to yourself as a deal finder. That's what you are.

That's the highest paid gig in the whole business anyway. So try to refer to yourself as a deal finder and see how that feels. Just take that on. Try it on for size. If you don't like it, you can always put it back up on the shelf. But just try that on and see how it feels. And then operate on a daily basis per your new title, your new title of deal finder. Just kind of notice the different results that you get, the different actions that you take

and the different options that you're going to have available to you. The bottom line is you should be well-versed in both agreement for deeds and lease options. So you'll be educated in a way that you can make those big decisions for yourself when they arise. And there's many more ways to those than just those two, right? Those are just agreement for deed and lease options. We didn't talk about subject two or the equity sharing or the wraps and the subject twos and all the other stuff that we've been talking about. And those are just all different ways that you can learn to earn with every deal that you find.

So if you're a good deal finder, now you've got a full toolbox. That's being a real estate investor. That's being an epic investor. So get well-versed in all of the different strategies in terms to buy and sell property. That makes you a real estate investor. And you can stay tuned here as we cover it all because we're going to continue. We're going to stay on this path for probably a while. while probably for the unseeable future just because of the feedback.

Or you can move a little faster by downloading the same cheat sheets that I give to my private clients at epicbreakthrough.com. That's where those creative financing terms, those little deal structure samplets, samples. I was going to say samples and then I was going to say templates and then it came out of samplets. But epicbracthrough.com, just go downloads. They're for free.

And there's other stuff there to buy if you want. Don't get all offended. But those are free and just grab those and embrace them and start. learning them. So when these new opportunities come your way, you can, you have options, right? You've got options and options is what really creates freedom. All right. Now, if this is all really confusing and you want to interact with me and you want to exchange ideas with me, you've got questions or specific deals you want to look at from certain different angles, then go to creative financing 2020.com. Creative financing 2020.com and register. And then I'll see you

Saturday. We'll spend two wonderful hours together and giving you some answering your questions and hoping you get things done. How about that? All righty? So if you found this episode valuable, who else do you know? Who else do you know that would find this valuable as well? When that name

comes to mind, please share it with them. I'd be very grateful and then ask them to click the subscribe button when they get here, already? And I'll take great care of them. That's it for today. God loves you and so do I. Health, peace, blessings, and success to you. I'm Matt Terrio. Live in the Dream. Take care. Yeah, yeah, we got the cash flow.

Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. You didn't know, home boy, we got the cash flow. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.