We have a new construction house for sale, in a well-to-do suburb of Detroit, MI. We've been approached by a couple, recently married, both bringing children into the family, and both with past credit problems. It's been recommended that we offer them either a land contract or a lease with an option to buy for one year allowing time for their credit to be fixed. At the end of one year they can then get refinanced into their own mortgage. Which option is better for us if we needed to evict the tenant, land contract or a lease?

Hello michael:

If you are requiring them to either purchase your home and get their own financing, or leave in a year, then NEITHER of those things will work.

Unless you plan to offer huge incentives, like huge discount off your sales price, or a major discount off market rates for rent, or you're willing to finance them yourself, what you need is just your regular old ordinary lease.

An arrangement such as the one you mention might suit your needs, but it won't meet the needs of your buyers/tenants. If they can't get financed now, I doubt things will change much in a years time. Their credit won't be repaired enough by then to qualify, and they'll need a hefty down payment.

Plus, the land contract by itself should require a huge down payment to you BEFORE they move in. The option buyers would have to pay MORE than market rates for their monthly rent in order to secure their option. And if they can't get financed in a year, the option buyer would LOSE all the extra he paid every month, and the land contract buyer would LOSE his down payment. Nobody would do that.

excon