Installment Option
What is an Installment Option?
An Installment Option is an option contract wherein payments are made in installments. It can also be said that it is a 'lease purchase' wherein ‘lease’ payments are replaced with interest payments.
To protect all parties, a full title review and notarized documents are required. Escrow Services Inc., a third party administrator, is appointed and becomes owner’s agent in order to handle property insurance, tax and underlying mortgage issues. A Memorandum of the contract is recorded in the public records to protect all parties.
The administrator is responsible for collecting the payments, paying any underlying mortgages and issuing IRS 1098 interest reports. In the event of nonpayment, the administrator sends the required notices.
Escrow Services, Inc. is the only commercial administrator that has the experience and expertise required to properly service Installment Option contracts.
The Installment Option contractually incorporates many of the positive features that are statutorily provided in a Bond for Deed contract in Louisiana, protecting both buyer and seller. Therefore, the Installment Option is an instrument used in lieu of a Bond for Deed outside the state of Louisiana.
When to Use an Installment Option
Owner Financing: Use an Installment Option whenever the owner will finance all or a portion of the sales price. Canceling an option for non-payment is much less costly than foreclosure.
Save Money: Use an Installment Option to save closing costs. When you buy or sell property under the Installment Option contract, you do not have to pay ‘points’, appraisal and survey fees, private mortgage insurance (PMI), or for repairs required by the mortgage company before it will make a loan.
Mortgage Not Assumable: Use an Installment Option whenever an existing mortgage has restrictions against assumptions, land contracts, contracts for deed, Bond for Deed and transfer of beneficial interest under a land trust. The owner can 'wrap' existing mortgages within the terms of the Installment Option.
Purchaser/Property Doesn’t Qualify: Use an Installment Option whenever the purchaser or the property does not qualify for a loan. Many would-be purchasers cannot qualify for a new mortgage...sometimes the property does not qualify…the reasons are endless. The terms of the Installment Option are strictly between the owner and the purchaser.
Additional Information about Installment Options
Maintenance: The purchaser is responsible for repairs, maintenance, etc. after the closing of the Installment Option contract.
Insurance: Property insurance is issued in the owner’s name with purchaser paying the premiums and named ‘additional insured’.
Tax Deductible: The IRS treats an Installment Option the same as an installment sale for interest and depreciation purposes.
Bankruptcy: In the event the owner files a bankruptcy action, the purchaser is protected by the U.S. Bankruptcy Code, provided the Memorandum of the Installment Option is recorded in the public records.
Default: The Installment Option allows the owner to cancel the contract and take back the property if payments are not made within the time allowed and without thecostly expense of foreclosure.
