Real Estate Investing Basics

Land Contracts: Could They Be The Most Valuable Tools In Your Toolbox?

54 Articles Written
land contracts in your real estate toolbox

Across the country traditional financing has slowed. For real estate investors financing sales on land contract is now a great tool to have in your toolbox. Using a contract to sell your real estate can help open the door to more potential buyers, increase flexibility in negotiations and create cash flow in the process. Not all contracts are created equal. Here are a few things to remember when selling your property on land contract.

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Down payment: The higher the down payment the better. That goes without saying, but you have to remember for every dollar your prospective buyer puts towards a down payment, that dollar represents another reason why the buyer will want to pay you each month without hassle.

Monthly Payment:  There are two schools of thought when it comes to monthly payments. Many property owners prefer to structure monthly payments like 30 year mortgages, while other contract holders prefer larger monthly payments and shorter contracts. Whatever you choose, remember, a contract is a long term commitment and the two parties need to work together for the life of the contract.

Interest Rate:  Another option that increases your flexibility as a seller is your ability to set the interest rate. Be sure to follow your state’s laws on interest rate caps to ensure your contract is enforceable.  In my next post I will show you how a higher interest rate can increase your return, and help the buyer own the home in a shorter time frame. This is a win-win for you and your buyer!

Balloon Payment:  Have the purchaser make 60 monthly payments and then require them to pay the balance owed to you on that sixtieth month.  Sounds great, right? The problem with this model is that 90% of the contracts you write with a balloon either default or have to be re-written under new terms. Don’t assume just because you have a balloon payment in the contract, you are guaranteed to get that balance.  A balloon payment works in some circumstances, just be sure when you write it into the contract you have a contingency plan in place for the contracts you own.

Qualify, Qualify, Qualify: Treat the land contract sale as if you are qualifying the buyer for a bank loan. Do credit checks, ask for tax returns, pay stubs, and check references. More legwork up front, means less headaches after the contract is in place.

Use a title company:  While this may seem simple and a no-brainer, you should always work with a reputable title company to ensure that your contract is in compliance with the SAFE Act. Furthermore, there are documents required in every state to ensure your contract is properly recorded, properly structured and enforceable. The small fee they charge to close a contract is worth piece of mind. Always protect your name and your integrity.

Following these principles will help you construct a contract that works for you, your buyer, and builds a solid asset for your business while creating passive income.

Photo: Robert S. Donovan

    Chris Dowd
    Replied over 9 years ago
    I can’t stress enough the importance of the first bullet point. Get a large down payment. Not only is it an incentive to stay as with many contracts for deed the buyers can cause significant property damage especially if you decide to foreclose. You may need than 10% to repair your property. Always remember you are not a bank and you don’t have bank resources make sure at get a much down as you can and alway charge a point or 2 over what you borrow at with the flexibility to increase the rate if your cost of funds go up. To sum it up plan for the worst hope for the best and you won’t be disappointed.
    Carrie Cathey from Phoenix, Arizona
    Replied over 5 years ago
    Replied over 9 years ago
    What about the safe Act? before I used to do around 10 per year. N ow they want me to be a Broker?What can I do?
    Kevin Kaczmarek
    Replied over 9 years ago
    Tony, each state has some unique requirements as it relates to the SAFE ACT. I would check with your state’s website to see how they interpret the law.
    Matt Mathews
    Replied over 9 years ago
    You may want to check out the use of a Land Trust rather than a straight Land contract. A Land trust will protect the seller against any foreclosure liability. Also, the note, can be sold at a higher value because of that protection.
    Kevin Kaczmarek
    Replied over 9 years ago
    Great insight as always Matt! Thanks for the tip!
    Replied almost 9 years ago
    Why is a land contract better than just offering a mortgage?
    Carrie Cathey from Phoenix, Arizona
    Replied over 5 years ago
    Are there states where land contracts dominate the most, or are they pretty well spread out through the US?