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% interest to charge for Land Contract

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Nick M.

Real Estate Investor from Sterling Heights, Michigan

Feb 24 '13, 06:07 PM


A tenant is interested in buying the house he is renting from me via Land Contract. I have not done this before and would like some opinions on what to look for and how to set up the payment?

I am curious what common interest rates should be charged for a land contract - Credit is not the best, they cannot apply for a mortgage so I will finance. Is 6% too low, 9% too high? What about the price of the house? Should I charge a higher price because of the risk I am taking with selling it on Land Contract?

Should I be cautious and collect money for insurance and taxes any pay it myself of let them pay it and I will only collect interest and principal?

Any thoughts are appreciated...as you can see I am new to this and maybe some of these questions are trivial but trying to be on the safe and legal side.

Thanks in advance.



Rob Gillespie

Wholesaler from Valley City, Ohio

Feb 24 '13, 06:13 PM


Nick,
I would do a Lease with an option to purchase on two separate docs.
A land contract could require a foreclosure to get the buyers out. A lease Option is usually an eviction. Plus the tax consequences for a land contract are not as sexy for you like a lease Option.
Now with that said, if you are gonna ignore me and still want to do a land contract, I would charge 18%. That is what I charge when I lend money. It is all about the availability of the financing, not the cost.
If they are not happy with it, tell them that rent is 100% rent, you are saving them 82% on your program.
Good luck!!



Nick M.

Real Estate Investor from Sterling Heights, Michigan

Feb 24 '13, 06:24 PM


Thanks Rob for your comments. I just mentioned land contract because that is what I heard of when selling a house and I act as the lender. Not familiar with the lease option but it sounds like that might be a better idea.

How would such a deal be constructed?
Thanks,



Kyle Hipp

Residential Landlord from Appleton, Wisconsin

Feb 24 '13, 06:33 PM
1 vote


I have done a couple land contracts as the buyer. I'm not sure I would want to do one as a seller especially to a person that cannot qualify for a mortgage at this point. If however they are 6 months from qualifing and maybe got a great job 18 months ago and have cleaned up all their other debt and just waiting on the 2 year on the job criteria, maybe. Do they have 15% down and just need to continue saving to get the 20%, more likely.

I doubt this is the case from the way it sounds, but pretend you are the bank because you will be. Make a strict judgement on whether you truly believe they will be able to refinance the property in the term of the land contract. If you have a firm belief they can qualify in the near future, I would still require at lease 10% down and at least 8% interest. You are taking a large risk, especially knowing the banks say they are not qualified. I would also ask top dollar for the house.

In the end, would most likely not do it. I purchase properties for a reason and I wouldn't want a long drawn out land contract where I give up all access to the property and have to go through the foreclosure process if something goes wrong. It is a scary proposition.

I would agree with Rob, look into a lease with an Option to Purchase on separate documents. You retain much more control and it mitigates a lot of the risk involved with a currently unqualified buyer.



Rob Gillespie

Wholesaler from Valley City, Ohio

Feb 24 '13, 06:49 PM


It is very simple to do. Just a standard local lease agreement and then a standard option agreement. Check with your local state laws first. If you want to use my attorney, he does nation wide. I can pass ya his info if ya PM me.



Michael B.

Apopka, Florida

Feb 25 '13, 08:28 AM
1 vote


Land contracts are inherently riskier than regular sales, and you have to be compensated for taking the risk.

Most of the time the price is raised, along with a reasonable interest rate. Maybe sell for a 20% above appraisal. More important than getting an interest rate is getting a good down payment, at least 15%, preferably 20%. That will keep him interested in paying and give you a little cushion to get him out if it goes South.

But a last note of caution. You're asking for trouble when you sell to a guy who can't qualify for a mortgage. That means he's stiffed creditors in the past, why would you be any different? You're taking a risk that is too risky for the banks. Understand that if the economy falters further there's a decent chance he'll stop paying, and if that happens there's a decent chance you'll have to spend a significant amount on lawyers to get a clear title again.

But it's all bad. I've been involved with 4 land contract deals over the years. Only 1 of those had any issues, and on that one we were able to work out a solution eventually. But just understand that if things go bad it's going to be harder to reclaim the house than it would have been to evict a tenant.


Updated: 09:17AM, 02/25/2013

The first sentence of the last paragraph should be: But it's not all bad.

Edited Feb 25 2013, 09:17


Angie Menegay

Real Estate Broker from Irving, Texas

Feb 25 '13, 08:31 AM
1 vote


I'm not really a land contract expert, but I believe you also cannot charge more than what your state's Usury Law allows for the loan. So I guess that will at least help set your maximum rate :).



Nick M.

Real Estate Investor from Sterling Heights, Michigan

Feb 25 '13, 08:40 AM


Ok, thanks to everyone who is talking me out of the land contract...sounds like a lot of risk.

It appears that the better solution is a Lease Option?

How does that work and how would it be set up in terms of price of the home? interest ? how much of monthly rent gets applied towards the price of the house, etc?

ANy thoughts would be greatly appreciated. Thank you



Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 25 '13, 08:47 AM
2 votes


Hope I caught you in time, I suggest you not follow any of this advice, see your attorney. 18% my rosey red, check on usury laws, there are differences between those in business and individual sellers.

Having been involved with more CFDs than anyone here, I'm sure, 10% interest is and has been the standard for over thirty years in the mid-west.

The problem with hazard insurance becomes an issue if there is an underlying mortgage with the seller, if it remains in the seller's name as owner the buyer needs a tenant/renters coverage, if it goes to the seller, the bank sees the new insured.

I suggest you credit taxes to the buyer and collect taxes from the buyer sufficient to pay them, your attorney should set this up.

It won't be long before someone gets nailed for perdatory practices, IMO.

A CFD is a financing arrangement. An option can be as well, depends on how the option price is credited and paid.

Check here (search) "Subject To" or "Sub-2", that may be a better arrangement.

With an option, you should not be over 10% as an option price. The only real tax advantage with options is the recognition of income in the event your deal fails to close, which some design to happen.

See your attorney and do not get involved in some system or strategy offered anywhere on the internet, you can certainly read them but before acting, see your attorney. Good luck!



Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 25 '13, 09:06 AM


Originally posted by Kyle Hipp:
I would also ask top dollar for the house.

All good, but seller financing or installment contracts DO NOT ADD VALUE to the property!

I'm not anti-making money, but anti-scamming, so be careful if you get a better price make sure it is paid in the down so that the property will appraise out in the future as needed, you can take a better price premium off the front end, just don't finance it.

Best way to make money is to buy right, not charge more to unsuspecting niave buyers and financing the deal.



Rob K

Real Estate Investor from Michigan

Feb 25 '13, 10:00 AM


@Nick M. I have a bunch of land contracts in Michigan that I'm collecting on. The max you can charge in our state is 11%. You can not charge any higher. I'm getting 11% on all of mine.

As far as land contract vs. lease option, there are pluses and minuses to both. @Rob Gillespie is right about being able to get someone out faster on a lease option. I have done both. If the land contract buyers default, the process is called forfeiture. There is a 90 day redemption period. It will take 4-5 months to get the people out. With a lease option, it will take 3-6 weeks.



Nick M.

Real Estate Investor from Sterling Heights, Michigan

Feb 25 '13, 10:11 AM


Originally posted by Rob K:
Nick M. I have a bunch of land contracts in Michigan that I'm collecting on. The max you can charge in our state is 11%. You can not charge any higher. I'm getting 11% on all of mine.

As far as land contract vs. lease option, there are pluses and minuses to both. Rob Gillespie is right about being able to get someone out faster on a lease option. I have done both. If the land contract buyers default, the process is called forfeiture. There is a 90 day redemption period. It will take 4-5 months to get the people out. With a lease option, it will take 3-6 weeks.

Thanks, this is great info to know; sounds like a lease poption is a better approach....I just have to learn how to structure it and how it works. Would you give me an example of how it would work based on the numbers below?
Current rent: $850
Sale price I would like to get $60K

Forgive my ignorance on this subject but how would the rent count towards the sale price?
Thanks,



Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 25 '13, 11:17 AM


Rent does not count toward the purchase, that gets mixed up easily with the rent to own concept. You have a lease, at market rents, then you have an option as a seperate contract and there is an option price to be paid. The option price is credited to the purchase price.

You will get into financing problems if a buyer is receiving credits from rents and if the buyer is tight on the deal, getting credits as thier source of equity to finance later on. The buyer goes to a lender and if there are any rent credits, the appraisers states what the CURRENT market rents are, only amounts credited above that amount will count to set the loan to value for the loan, since rents usually go up, that makes the buyer short of the down payment.

Don't get recent tax matters with rent credits confused with lending requirements, two different animals.

If you take more than 10% as an option price you are getting into a financing arrangement, that could ultimately require you to foreclose, an option gives an equitable interest and can have the same issues as other installment deals, so simply saying you can evict may not hold true.

Again, I suggest you look at the Sub-2 arrangements, pass title and wrap the note or take a sepearte note, it's cleaner than a CFD.

A L/O can work too, use seperate agreements and have an option price, you still need to underwrite the buyer, see when the can finance out and make it work.



Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Feb 25 '13, 11:51 AM
1 vote


Originally posted by @Bill Gulley:
...
Check here (search) "Subject To" or "Sub-2", that may be a better arrangement.
...

Sorry Bill Gulley - but I can't let anybody advise to sell to a tenant on sub2 - that would be BAD advice to give. I don't care if you've done it, or claim to have done it more than anybody else - it's still BAD advice to give.



Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 25 '13, 12:04 PM


Not sure where you are comming from Steve, state your case, if you're selling on a CFD what is your concern with a sub-2?

Many existing tenants buy, if the can qualify for one the will for the other. If the concern is the due on sale, where is that thread where disclosure should be accomplished....for either one?

Yes, I've been arounf both blocks a few times, only here will you find folks who don't value experience, LOL



Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 25 '13, 12:38 PM


Originally posted by @Steve Babiak:
Originally posted by Bill Gulley:
...
Check here (search) "Subject To" or "Sub-2", that may be a better arrangement.
...

Sorry Bill Gulley - but I can't let anybody advise to sell to a tenant on sub2 - that would be BAD advice to give. I don't care if you've done it, or claim to have done it more than anybody else - it's still BAD advice to give.

Steve Babiak, okay, explain Steve, tell me what prevents a qualified tenant from buying the property....

While, I'd say I can't wait to hear this one, I'm going to have to, I'm heading out, so may not get back until the am, but otherwise, can't wait and looking forward to the reason(s).....don't know, maybe there is a new law in PA barring tenants from buying properties...... :)



Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 25 '13, 05:22 PM


Seems to me like Steve is just has a rag on for me today, he sure can't muster his musket, now can he. If there is anyone on this site (you can call in anyone on earth you like BTW) to expalin why I'm giving bad advice, speak up. I mean really, saying I give bad advice and then riunning and hide, come one Steve, you can do better than this, pull up some links! Show me, I live in Missorri..... :)



Bill Gulley

Real Estate Investor from Springfield, Missouri

Feb 25 '13, 05:34 PM


BTW, if you, think this is going to be burried in the forums, think again, Steve, you need to save face here guy, telling me I give bad advice, and hide, come on, where is your justification? Still waiting.....



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