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3 Questions: Holding a Mortgage Versus Holding a Lease

The jury is out: Leasing a home is legally more beneficial than selling a home and holding the mortgage yourself.

Contest update: We did not have a winner last week. 

CONTEST ON/JTS ().  JT Simons, P.A., is holding a contest for you to figure out the hidden trivia question in this article. If you win, JT Simons, P.A., will donate $25 to charity. In short, figure out the hidden trivia question, send an email with the answer to JT Simons, and make sure your nonprofit is legitimate. Remember, send the answer to jts@simonslawfirm.com, subject line CONTEST ENTRY, and give me as much information as you can about the nonprofit you want the donation to go to. I need to verify it. I need your first name and the first letter of your last name.

Opening Statement

Members of the Jury, you are asked to render a verdict on whether it is more beneficial to lease your property or to sell the property and hold the mortgage yourself.

Traditionally (and probably still the most prevalent), an owner will list the property with a real estate agent and sell it on the open market. However, with property values where there are, some are considering other options. In a difficult real estate market, I see more and more property owners getting creative on making money in the absence of true buyers willing to buy at previously fair-market values. 

Specifically, some owners are selling their houses and essentially becoming the finance company. I sell you my house and I agree that I will hold the mortgage rather than a bank. You then pay me the monthly mortgage amount plus interest.  The other option is to rent your house out and make money off the rent. Some people will rent their primary home to a tenant and then become tenants in another property that costs less per month. 

As a litigation attorney, the ultimate question for me is what are your remedies if either the mortgagor (the paying party) or tenant stops paying? This article considers only the difference between selling a home and holding the mortgage yourself versus renting the home. Excluded is selling the house outright through a real estate agent (better article for a realtor) and a lease with the option to purchase (already been there, done that). With that, let’s consider the three questions:

THE TRIAL

1. Is It Easier To Sell A Home Versus Renting A Home?

Verdict: LEASE

From a paperwork perspective, it is usually easier to lease a house than sell it. Standard residential leases that come across my desk are form leases that are a few pages long. Once the lease is entered, the tenant moves in, and in a perfect contract world, you collect your rent and the house looks perfect when the tenant moves out. 

To sell your home and finance it yourself, you need at least the following: (1) a deed; (2) a promissory note; and (3) a mortgage. Technically I guess you only need a deed to transfer title, but if you want any security to get repaid, the remaining documents are the absolute minimum.

Note that there are also three types of deeds you need to consider: (1) quit claim deed; (2) special warranty deed; and (3) warranty deed. A quit claim deed is the most favorable to the seller, a warranty deed is the most favorable to the buyer, and a special warranty deed tends to be in the middle. 

The mortgage then needs to be recorded with the clerk’s office, taxes need to be paid on the recording, and the original promissory should be placed in a very, very safe place. Every buyer should also require a title search and title insurance, as well. 

Anyone that has bought a house with bank financing should have already thought, “Is this Jeremy Simons guy crazy? I signed substantially more than three simple documents!” I agree. I highly suggest that a real estate attorney and title company get involved in the sale of your property even if you are holding the mortgage. 

The point is that considering the options we are exploring, the paperwork for a lease is a much less complicated and a lease is usually a quicker way to turn the property into a revenue-generating resource.    

2. Is It Easier To Manage The Property When You Sell It Versus Leasing?

Verdict: SELL

This one is easy. When you lease property, you still own the property. Even if you are able to shift a majority of the upkeep and maintenance on the tenant, you still have a vested interest in the condition of the property. For example, I personally have never seen a lease that places the burden of replacing a roof on the tenant. If there is a leak in the roof or a code violation, that becomes your financial burden.

When you sell a home and hold the mortgage, you do not own the house and you are therefore relieved of any duty to maintain the property. In Florida (but not all states), the holder of the mortgage only has a secured interest in the property so the owner is exactly that: owner of the property. If there is a code violation or a new roof is required, that is the owner’s responsibility.

As such, in a lease, you as the landlord still have an affirmative duty to maintain the property according to the terms of your lease and Florida law. If you hold the mortgage, your only job is to collect the payments. 

3. When The Other Party Stops Paying, Which Option Is Easier to Recover What You Are Entitled To?

Verdict: LEASE

As a litigation attorney, I am tainted on this question. I have never had a client come in on a real estate litigation question and state: “the other party is absolutely perfect, they pay me, so I just want to figure out my rights.” I get involved when the other party stops paying the monthly payment. 

When you sell your home and you hold the mortgage, your remedy is to foreclose on the property. There are three practical points that one should know: (1) filing a foreclosure can cost almost $2,000.00 depending on the value of the home; (2) the amount of paperwork necessary to start a foreclosure is significantly more than a lease; and (3) in my experience, it can usually take over a year to complete a foreclosure.

For a lease, the filing fee in my county is $185.00. The initial paperwork is not difficult. Evictions fall under the summary procedure statute, which means the case is supposed to progress at a rapid pace. Additionally, unless the tenant contests the amount of rent due, the tenant cannot defend the eviction unless the uncontested rent is deposited with the clerk of court.  On average, I can get an eviction accomplished in 30 to 60 days. 

Closing Argument

Let’s be honest, when someone stops paying, you probably know you will not see the past due payments. What you want is to get your property back as quick as possible so it can start generating profit again. You also do not want to spend a ton of time or money to restart your income-generating source.  

To that end, my personal business belief is that when I weigh all the factors, especially the factor of what happens when payments stop, I would choose to lease my property rather than sell it and hold the mortgage myself.  The ultimate verdict rests in your hands, however.  Your contest question this week is an email to me telling me what your verdict would be. Of course posting your verdict on your patch.com page would be great, too.

Cecilia June 04, 2012 at 10:10 PM
In order to answer this question and render a proper verdict, the jury needs addiditonal information: 1) Is there currently a mortgage in place on the property? If so, does it allow for doing a wrap-around mortgage or would that trigger a due on sale clause? 2) What is the owner of the property trying to accomplish? If they no longer want to deal with the real property the best option is a straight sell with title conveyed via warranty deed and handled by a legitimate title company/closing attorney. If the owner is looking for income, then the cost of maintenance, taxes, insurance and LIABILITY insurance(something that most owners never consider when renting out property) that protects the owner must be taken into account when the cash flow is being considered. Additionally, real estate taxes will go up at least double to almost triple when the homeowner moves out of the property and loses their homestead rights. If a mortgage is currently in place and the home owners insurance and property taxes are included, be assured that the amount being collected each month to cover those items will be insufficient and there will be an escrow short-fall the following year that will make the mortgage payment increase and thereby decrease the anticipated monthly cash flow of the owner. See next post....
Cecilia June 04, 2012 at 10:19 PM
Evicting a tenant is expensive and tenants being evicted almost always leave a mess. However for $$$ everything is repairable and you will still have the property. Holding a mortgage as an individual cuts out the cost of home owners insurance, property taxes, maintenance and the need for liability insurance since you no longer own the property. Additionally if a person cannot qualify for a traditional mortgage, the person holding the note can generally charge a premium on the interest rate. However, if the owner has a mortgage in place, doing a wrap-around mortgage can trigger the due on sale clause and the owner may be forced to pay the existing mortgage in full in 30 days. Foreclosure is more costly than eviction and takes longer and you still have the likelihood of people doing damage who are not happy that they are going to be booted by a foreclosure. In addition, if the mortgagor(borrower) did not pay property taxes, you will be stuck with that bill and the courts are backed up big time on foreclosures. The verdict in this case, hung jury. Each of these methods of disposing of/managing real property come with risks and costs.

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