`AFS` vs. `Lease to Own` as an entrance strategy

[chadmielke]

I`m looking for some input from those who know better on the advantages and disadvantages of `Lease to Own` vs. `Agreement For Sale` as a way to get a property under contract via seller financing.

The biggest difference I see is that with a Lease to Own you are not obligated to buy the property after your initial contract term however with an AFS you are.

An AFS seems to provide more security to the Vendor as they know their property is sold as of the term but not with a Lease to Own.

So to me an AFS seems to benefit a Buyer more and a Lease to Own seems to benefit the seller more.

I`m currently working on a deal right now with a very motivated vendor who is offering me a Lease to Own as the form of seller financing. It seems like the way to go but I want to be sure that I`m not overlooking any key advantages/disadvantages to this scenario.

Would really appreciate some feedback! Thanks in advance!!

 

[tonypeters]

Chad,A great question!Before I provide you with an answer to your question, I would first like to review some of the various Creative Real Estate Investing strategies that are available for implementation. This is extremely important! As I have stated before, there appears to be quite a lot of confusion with respect to the use of some of the "creative" strategies, and specifically which ones should be used as "ENTRY" (go in the front door), and which ones should be used to "EXIT" (go out the back door).
So I will start by providing some clarification.

ENTRY (going in the front door) Strategies

Option - Or as I like to otherwise refer to it as…an "OPPORTUNITY" card
Lease Option - Lease property with an "Option" to buy it a some point in the future
Agreement For Sale (AFS) – Pretty much a glorified Residential Real Estate Purchase Contract with a long closing. It typically includes some (creative) "seller financing" terms

EXIT (going out the back door) Strategies

Lease with Option to Purchase - Lease to Own or Rent to Own to a qualified Tenant/Buyer
Mortgage Wrap - Or otherwise known as a "blanket mortgage" here in Canada

Now that I have defined the various (creative) "ENTRY" and "EXIT" strategies and their individual uses, I will now answer your question; The Agreement For Sale (AFS) strategy will essentially provide the "seller" with more comfort that you are actually going to "close" on the property". WHY? Because you have actually agreed to "purchase" the property at a "fixed" price, with a "fixed" closing date and typically with a few (creative) seller financing terms attached. In essence…it`s a DONE DEAL!

On the flip side, the "Lease Option" is exactly that. It`s a "Lease" with an "Option". In layman`s terms, the "buyer" (you) have agreed to "Lease" the property, with the "Option" to purchase it during or at the conclusion of the (fixed term) Lease. The downside for the seller, you are not (legally) obligated to exercise your Option to Purchase. As a result, this type of contract does NOT provide the seller with any formal (legal) binding commitment, so it is typically viewed as a much "weaker" type of arrangement.

However, there is one Caveat here; if the seller is in a "distressed" type situation, they probably wouldn`t care less which strategy you use. The "Lease Option" contract is quite popular in the United States, but it is one strategy that is not used as much here in Canada. I have not personally utilized it either, and for the reasons I have already stated. My personal recommendation; stick with the "AFS".

Here is another tip: If the property is in a "distressed" situation, I typically do not mess around with the "AFS" strategy. I get the deal done by utilizing OPM (other people`s money and or their ability to qualify for a new first mortgage). My closing strategy will ultimately depend on my "EXIT" strategy of choice.

From personal experience, and I do NOT mind admitting this; I was "TOTALLY" confused when I was first exposed to the many different (creative) "ENTRY" and "EXIT" strategies that were available. But once I wrapped my head around them and understood and mastered them, what an extremely "POWERFULL" set of tools I added to my Real Estate Investing tool pouch!

As you are aware, I have been travelling the Creative Real Estate Investing path for over seven years now, and as a result I have utilized many of the different strategies. I have even created a few of my own.

While these strategies are extremely powerful, it is absolutely IMPERATIVE that you "educate" yourself BEFORE heading down this path! This is one of the BIG reasons WHY I have, and I continue to advise others that the Creative Real Estate Investing business can be a (potential) minefield! Possessing documents and not taking the necessary time to clearly understand the strategies and concepts...has the potential to become a "disaster" for not only the real estate investor, but also the person you are purchasing the house form, or the person you are trying to help.

To put it into perspective; it`s really no different than handing somebody the keys to your car, but they have never driven a car before! Not a great idea!

You have probably heard this saying before...a little information can be a DANGEROUS thing! This could not be any closer to the truth in this business!

I hope I have answered your question, and my feedback will be of assistance to you and others that read this thread?

My apologies for "writing a book", but I wanted to take the necessary time to provide you (and others) with a very clear and detailed response.

P.S. CONGRATULATIONS on your recent (almost no money down, no bank qualifying) property acquisition!

All the best to you Chad!


QUOTE (chadmielke @ Feb 1 2010, 12:53 AM) I`m looking for some input from those who know better on the advantages and disadvantages of `Lease to Own` vs. `Agreement For Sale` as a way to get a property under contract via seller financing.

The biggest difference I see is that with a Lease to Own you are not obligated to buy the property after your initial contract term however with an AFS you are.

An AFS seems to provide more security to the Vendor as they know their property is sold as of the term but not with a Lease to Own.

So to me an AFS seems to benefit a Buyer more and a Lease to Own seems to benefit the seller more.

I`m currently working on a deal right now with a very motivated vendor who is offering me a Lease to Own as the form of seller financing. It seems like the way to go but I want to be sure that I`m not overlooking any key advantages/disadvantages to this scenario.

Would really appreciate some feedback! Thanks in advance!!

 

[GordonDaniel]

Great info, thanks Tony!GordQUOTE (tonypeters @ Feb 1 2010, 11:58 AM) Chad,

A great question!

Before I provide you with an answer to your question, I would first like to review some of the various Creative Real Estate Investing strategies that are available for implementation.

This is extremely important! As I have stated before, there appears to be quite a lot of confusion with respect to the use of some of the "creative" strategies, and specifically which ones should be used as "ENTRY" (go in the front door), and which ones should be used to "EXIT" (go out the back door).

So I will start by providing some clarification.

ENTRY (going in the front door) Strategies

Option - Or as I like to otherwise refer to it as…an "OPPORTUNITY" card
Lease Option - Lease property with an "Option" to buy it a some point in the future
Agreement For Sale (AFS) – Pretty much a glorified Residential Real Estate Purchase Contract with a long closing. It typically includes some (creative) "seller financing" terms

EXIT (going out the back door) Strategies

Lease with Option to Purchase - Lease to Own or Rent to Own to a qualified Tenant/Buyer
Mortgage Wrap - Or otherwise known as a "blanket mortgage" here in Canada

Now that I have defined the various (creative) "ENTRY" and "EXIT" strategies and their individual uses, I will now answer your question; The Agreement For Sale (AFS) strategy will essentially provide the "seller" with more comfort that you are actually going to "close" on the property". WHY? Because you have actually agreed to "purchase" the property at a "fixed" price, with a "fixed" closing date and typically with a few (creative) seller financing terms attached. In essence…it`s a DONE DEAL!

On the flip side, the "Lease Option" is exactly that. It`s a "Lease" with an "Option". In layman`s terms, the "buyer" (you) have agreed to "Lease" the property, with the "Option" to purchase it during or at the conclusion of the (fixed term) Lease. The downside for the seller, you are not (legally) obligated to exercise your Option to Purchase. As a result, this type of contract does NOT provide the seller with any formal (legal) binding commitment, so it is typically viewed as a much "weaker" type of arrangement.

However, there is one Caveat here; if the seller is in a "distressed" type situation, they probably wouldn`t care less which strategy you use. The "Lease Option" contract is quite popular in the United States, but it is one strategy that is not used as much here in Canada. I have not personally utilized it either, and for the reasons I have already stated. My personal recommendation; stick with the "AFS".

Here is another tip: If the property is in a "distressed" situation, I typically do not mess around with the "AFS" strategy. I get the deal done by utilizing OPM (other people`s money and or their ability to qualify for a new first mortgage). My closing strategy will ultimately depend on my "EXIT" strategy of choice.

From personal experience, and I do NOT mind admitting this; I was "TOTALLY" confused when I was first exposed to the many different (creative) "ENTRY" and "EXIT" strategies that were available. But once I wrapped my head around them and understood and mastered them, what an extremely "POWERFULL" set of tools I added to my Real Estate Investing tool pouch!

As you are aware, I have been travelling the Creative Real Estate Investing path for over seven years now, and as a result I have utilized many of the different strategies. I have even created a few of my own.

While these strategies are extremely powerful, it is absolutely IMPERATIVE that you "educate" yourself BEFORE heading down this path! This is one of the BIG reasons WHY I have, and I continue to advise others that the Creative Real Estate Investing business can be a (potential) minefield! Possessing documents and not taking the necessary time to clearly understand the strategies and concepts...has the potential to become a "disaster" for not only the real estate investor, but also the person you are purchasing the house form, or the person you are trying to help.

To put it into perspective; it`s really no different than handing somebody the keys to your car, but they have never driven a car before! Not a great idea!

You have probably heard this saying before...a little information can be a DANGEROUS thing! This could not be any closer to the truth in this business!

I hope I have answered your question, and my feedback will be of assistance to you and others that read this thread?

My apologies for "writing a book", but I wanted to take the necessary time to provide you (and others) with a very clear and detailed response.

P.S. CONGRATULATIONS on your recent (almost no money down, no bank qualifying) property acquisition!

All the best to you Chad!

 

[AlisonKeighan]

Tony, please correct me if I`m wrong. In BC, if you purchase through an AFS, I believe the title transfers to you before it reaches the end buyer and therefore you get stuck with the provincial land transfer tax. If you lease option to control the property and then (sub) lease option it to the end buyer, I think you can arrange the title to transfer from the original seller straight through to the end buyer. The title never goes in your name and thus, you avoid land transfer tax.
Is that right?

Alison

 

[tonypeters]

You`re very welcome Gord! I am glad to hear it was of benefit to you.

QUOTE (GordonDaniel @ Feb 1 2010, 12:51 PM) Great info, thanks Tony!

Gord

 

[tonypeters]

Alison,I am not fully conversant with all of the real estate rules and regulations in BC, so it would be best advised for you to consult with your own legal counsel.
However, with that said, I can offer you this; technically speaking the "AFS" is a Residential Real Estate Purchase Contract with a "delayed" closing date. Because the closing date is delayed, title does not effectively transfer until you actually close on the property and the transaction is registered at Land Titles. As a result, the Transfer Tax should not be triggered until the sale is concluded.

On the flip side; if you are able to register the AFS and it actually triggers the Transfer Tax at the front end of the transaction, and depending on how much cash (and it should not be too much when structuring these type of deals) you may have to provide the seller, a few extra dollars in tax may not be such a big deal anyway?

Just my two cents worth, but like I said, I would highly recommend you consult with your own legal counsel and explain "what it is you are trying to achieve", that way he or she can guide you accordingly.

Here is another Tony`s TIP: Before consulting with your legal counsel (or accountant for that matter), I cannot stress the importance of "education". If you are NOT educated or fully conversant with "what it is you are doing", you will only CONFUSE the people you are trying to educate. There is an old saying that goes...The confused mind will ALWAYS say NO!

Hope this helps?

QUOTE (AlisonKeighan @ Feb 1 2010, 02:12 PM) Tony, please correct me if I`m wrong. In BC, if you purchase through an AFS, I believe the title transfers to you before it reaches the end buyer and therefore you get stuck with the provincial land transfer tax. If you lease option to control the property and then (sub) lease option it to the end buyer, I think you can arrange the title to transfer from the original seller straight through to the end buyer. The title never goes in your name and thus, you avoid land transfer tax.
Is that right?

Alison