Sold 1 property via Land Contract, What am I missing?

2 Replies

Greeting,

I have invested in Real Estate since 2004, mostly as a passive investor. I had two partnerships, one that we sold as a lease option which performed, and another that hasn't performed in 13 years, though there has been many people try. After that I bought several multi family homes and gave that a go, but I bought wrong at the wrong time ('08) and after that I kinda backed off. 

I moved out of my own house in 2009 and turned it into a rental, but since we were moving out of state, I had a property management company that a friend owned run it for the last 8 yrs. As you can imagine, I haven't made a ton, but it paid the mortgage and I did make a couple thousand a year off the rent. About 6 years ago I got inspired to do Real Estate again and I bought 2 $20k properties in South Bend, IN for cash over the course of 2 years, and had the same property management company run them as well. The first property has been a good rental and I probably make $4k a year from, and the other house the tenant moved out of fairly soon after acquiring the house, and the property management company said that the house would need $10k in repairs. In addition, the insurance company noticed a place on the back of the house that had some siding issues and refused to insure the property, so I went back to my friend and said what's the deal with this house you sold me? Long story short, he helped me find someone willing to buy the house on Land Contract, and here is what that deal looked like:

Sold the house for $35k

Down Payment $3k

Interest 8%

Monthly Payments of $305 for 20 years

Buyer responsible for Mortgage and Insurance, plus I am listed as the first beneficiary on the house if there is an issue.

We had an attorney write up the contract and the deed is to be recorded in the buyers name at the completion of payments.

Prior to this deal, I had a tenant in the house for $450 a month, which after the 10% property management ($45), Taxes ($800 year / $75 a month) and insurance ($600 a year / $50 a month). As a rental I received $450 - 75 - 50 - 45 = $280 per month, now I make $305 a month, and if this buyer performs, I will have received around $70k for this house after interest. If the buyer doesn't perform, I do it again. So far, in 2 yrs, the buyer (who is an investor) has only been late on the payment once, and he let me know in advance and added the late fee without being prompted to. This seems like a very wonderful way to invest, I have an exit strategy (if it performs) I am guaranteed to sell my property for a profit, no expensive repairs, etc, and the monthly income is higher than it was as a rental. It makes me want to turn my other rentals into land contracts as well, and ditch the property management company (which my friend has since sold). I recently bought my 4th house (also cash with no mortgage), and the plan is to sell this one via land contract as well.

All of this has gotten me thinking, what are the biggest risks to investing in real estate this way? Why aren't other people doing this? What has your experience been like doing land contracts? This seems to much better than renting, what's the elephant in the room I am missing?

I bought a place from an owner who previously had it under land contract. The lady moved out and let her kids live there while she still payed. They had 14 people in there at one time including the detached 1.5 car garage. They put a window unit air conditioner in there so that was clever. The House was 860 sq.ft. so living in the garage made sense if you needed to get some some quiet and get away from the bed bugs and such. They eventually left after numerous complaints from the neighbors and visits from the humane society, local housing authority and CPS. Enter the investor, who buys the devastated crap hole for pennies in the dollar. The owner lived hours away and had no idea the house was in shambles.

This might seem extreme but it is real and was in South Bend.

I agree. Lease options (and the like) have always seemed like a beautiful exit strategy. However, I think there are more risks involved, since you own it. Like, if there is a major cap expenditure and you or your tennant aren’t prepared to deal with it. Further, you should get the advice of a lawyer. He or she can guide you with state laws and interpretations, especially landlord laws and contracts. One suggestion would be make the tennant/buyer purchase a home warranty. While this is typically not a cost effective purchase for home owners, this does a couple things. First, it further instills the sense of homeownership to the tennant/buyer. Many, if not most, homeowners neglect to have savings to cover major expenses and would be homeowners are just as likely. Second, it gives THEM a number to call when work needs to be done to the house. Additionally, having them name you insured on their renter’s policy is a good idea, but not entirely foolproof. Also, collecting a significant option deposit is one of the best ways to ensure a successful execution of the option (a lot will tell you 3-5%, but 10% works better for so many reasons. Finally, develop a relationship with a mortgage broker that can aid the tennant/buyer purchase the property by helping get their credit repaired.

There are many other things to consider, but I am not an expert in the field. I have just been analyzing it as a strategy, as well.

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