Land Contracts. A Good Deal or a Potential Disaster?

By
Real Estate Agent with Remerica Integrity, Realtors®, Northville, MI
http://actvra.in/CVb

Land Contracts. A Good Deal or a Potential Disaster?

While buying a house on Land Contract sounds like a great idea, here are a few potential pitfalls to think about:

There are a few things to consider before going after a land contract home.

First, they usually require a 20% down payment or more. Most of the time, the lack of funds is the reason that you can't get a mortgage in the first place. The homeowner will require a credit check, references, W-2's, etc, just like a mortgage company would. So, if you've recently had a bankruptcy or foreclosure, it's going to be extremely hard for the seller to take a risk on you.

Second, will you keep second guessing your decision? It's not like renting. If you leave, you'll be out the monthly payments, your substantial down payment and could be sued by the original owner for not purchasing, because you already have a legal contract in place.

Third, what if the original owner stops making payments and your "new house" gets forecloses on? The bank/investor who holds the mortgage on the property doesn't care that you've been making payments to the owner, they just know that they weren't getting them. After the third missed payment, the foreclosure process starts. The only way to save the house after that is to pay the entire loan off before the redemption period is over.

"Land Contract" seems to be the latest buzz-word. If you want to buy a house, give me a call or send an email and we can talk. I have a few lenders that can check your credit and if it's not up to par, they'll let you know what to do to get your scores up in the least amount of time so you can buy a house as soon as possible. If you still want to buy a house on Land Contract, we can work with you on that, too.

*This is a partial list of things that could go wrong with a Land Contract. There are also way to ensure that you don't go through these. Contact me and we can discuss this in more detail.

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  1. Debbie Reynolds 06/24/2012 12:23 PM
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Rainer
48,633
Nicholas Crane
Woodland Management Service

Thanks Eric for this post I think that too many potential home buyers dont have a clue before they decide to waste sellers time. 

June 23, 2012 06:39 PM
Rainmaker
540,110
Eric Michael
Metro Detroit Real Estate Professional 734.564.1519
Remerica Integrity, Realtors®, Northville, MI

Nicholas, it's not just a matter of wasting the homeowners time, they really need to understand that buying a land contract is a serious thing.

June 23, 2012 06:42 PM
Rainmaker
617,382
Deborah Byron Leffler BzyBee Real Estate Lady!
Keller Williams Realty Boise

Oh boy...our office doesn't allow an agent to do them....they are so very risky!  I love the way you explained it! 

June 23, 2012 06:48 PM
Rainmaker
540,110
Eric Michael
Metro Detroit Real Estate Professional 734.564.1519
Remerica Integrity, Realtors®, Northville, MI

Deborah, thanks. I do what I can to help people, but way more often than not, they rent until they can buy.

June 23, 2012 07:00 PM
Rainmaker
1,033,780
Joan Whitebook
Consumer Focused Real Estate Services
BHG The Masiello Group

I am afraid I still do not know what a land contract is.  It doesn't sound like a good idea though.

June 23, 2012 07:03 PM
Rainmaker
160,481
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp.

One of my first investing strategies was to use land contracts as they didn't trigger the "due on sale" clause. The best advice I can give people is to look into Bill Gatten's land trust technique. All potential risks, for both parties, are addressed and protected.

June 23, 2012 07:43 PM
Rainmaker
714,035
Jackie Connelly-Fornuff
Century 21 AA Lindenhurst NY
Long Island NY Real Estate Agent

Thanks for shedding light on land contracts. I think it is also best to rent until you can buy. It's safer.

June 23, 2012 08:26 PM
Ambassador
1,440,161
Liz and Bill Spear
RE/MAX Elite Warren County OH (Cincinnati/Dayton)
RE/MAX Elite 513.265.3004 www.LizTour.com

Hey, someone got a Gold Star before I could punch the Suggest button!  Great coverage on a topic that's pretty confusing to many.

June 23, 2012 08:41 PM
Rainmaker
567,872
Hella Mitschke Rothwell
Hawaii & California Real Estate Broker
(808) 226-1095 or (831) 626-4000

Land contracts should only be done if its purely owner financing.  Would probably work for vacant land in this economy.

June 23, 2012 09:46 PM
Rainmaker
1,076,675
Wallace S. Gibson, CPM
LandlordWhisperer
Gibson Management Group, Ltd.

Land contracts have been around for DECADES - in fact, longer than BANKS and they are very common for raw land purchases.  

A knowledgable attorney is a MUST

June 24, 2012 03:10 AM
Rainmaker
1,203,318
Richie Alan Naggar Author PEARLS SERIES of books
on LIFE and LOVE plus Real Estate too!
People first then business! Ran Right Realty Riverside, Ca

There was a time when this concept was on point and being used....I haven't seen or heard of a deal like this for some time...If it can help someone get in or get out of Real Estate, so be it...I agree with Wallace my learned friend in summer cubicle #10  however. Attorney a must here

June 24, 2012 06:58 AM
Ambassador
2,032,195
Todd Clark
Broker - Beaverton, Oregon Real Estate Expert - (503) 524-9494
Keller Williams Realty

All things that are true, but there are way to protect yourself. Use a 3rd party escrow company that pays the underlying mortgage and taxes first, then remaining money goes to the seller. Two, make sure you record the sale with the county and get the title put in your name. (Most people can't sell on contact if they don't have the mortgage paid off - Mortgage company wants to be paid off "Due on Sale"

The owners I deal with on these types of sales, really don't care what type of credit you have if you can come up with the down payment. They know they get the 20% down and the home back if you stop paying.

Also, this can be great for you the real estate agent as it puts sales in your pocket from people that can't qualify with the banks.

June 24, 2012 07:05 AM
Rainmaker
949,545
Greg Nino
Houston, Texas
RE/MAX Compass, formerly RE/MAX WHP

Hey Eric,

 

Good stuff. A lot of borrowers/buyers in this situation also don't realize they have to pay a higher interest rate. Here it's about 6%.

June 24, 2012 07:18 AM
Ambassador
982,467
Debbie Reynolds
Your Dedicated Clarksville TN Real Estate Agent
Prudential PenFed Realty, "The Real Debbie Reynolds" Your Clarksville Real Estate Professional, 931-920-6730

Eric, This is a great blog with valuable information. In fact I am going to reblog it. Thanks.

June 24, 2012 12:17 PM
Ambassador
514,277
Cindy Marchant
"Cindy in Indy" , Realtor, Fishers Real Estate
Keller Williams Indy NE 317-290-7775 www.marchantteam.com

Land Contracts are becoming popular here in Indy as well...but our attorney advised that the seller's mortgage can be "called" if they sell on land contract so many of our sellers won't take that risk.

June 25, 2012 04:57 AM
Rainmaker
540,110
Eric Michael
Metro Detroit Real Estate Professional 734.564.1519
Remerica Integrity, Realtors®, Northville, MI

Thanks for all the comments.

The one thing I wish I would've mentioned in the initial post is what Todd Clark brought up. Most mortgages have a "Due on Sale" clause, meaning that if the owner has a mortgage, and they "sell" the house on land contract, the mortgage company wants ALL their money right then.

July 11, 2012 03:32 PM
Anonymous
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Rainmaker
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Eric Michael

Metro Detroit Real Estate Professional 734.564.1519
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