Land Contract deal, fear of going through with it....
Real Estate Investor · Ypsilanti, MI · Member since 2011 · 98 posts · 6 votes
Heres the real estate deal:
Property is hour an half drive from where I live in Michigan
All in for $16K, re sell on land contract for $25K
Buyer agrees on putting down $1200 and paying $500 a month until the end of this year and next year will pay $3000 from tax return on top of $500 a month rent which gives me a cash on cash return of about 78%. All utilities, repairs, taxes, insurance, maintenance covered by buyer.
Called my mentor, he told me don't do it.
What do you guys think about this now? Deal or no deal
I've talked at length with a local investor who specializes in land contracts in Michigan. In fact, he's a third generation land contract investor, has been president of the state mortgage broker association, held positions in the national mortgage broker association, is on the board of the Michigan realtor board and advises the state rule-making body on financial regulations. Which is all to say he knows his stuff and has been doing it for decades.
He's pulled completely out of land contracts in Michigan unless on commercial property for commercial business purposes. No more dealing with homeowners at all. The problems with homeowners are many, but a big one is that any foreclosure can be fought by the homeowner's attorney on the basis that you as the lender should have known that the buyer would not have been able to afford the home. The penalties can dwarf any potential profit you would have made.
He's not the only real estate investing professional who's left the land contract field in Michigan. I have no doubt some investors are still doing it, just as I know some are still not complying with the EPA lead rules from a few years ago (with the $37,500 fine). There's just a lot of risk involved and most investors don't seem to be aware of the landmines, which is understandable since the rule making process has resulted in information coming out sporadically, with some 180 degree changes. In fact, the situation now is different than it was in March of this year.
I guess it's one of those things like pulling permits, where some people choose to take their chances. Unfortunately with land contracts in Michigan most investors don't seem to know the rules or understand the magnitude of the penalties. Some one is going to be made an example of.
Do you have a buyer lined up who has agreed to all of these terms? Is that buyer a reliable person, who you have full faith in?
If not, 9k doesn't seem like a huge margin to work with. That can disappear in a hurry - say you need a new roof, a new water heater, and some flooring - poof, it's gone.
It's hard to know for sure - obviously no one on here has seen the house, or met the seller, or talked to potential buyers. But it seems pretty thin. It's possible that it could work, but you're banking on things going quite right.
Overall, trust yourself. However, make sure that you're not 'pressing' just to get a deal done... more good ones WILL come your way.
It would depend on the credit of the buyer for me and their cash flow situation. I would want to make sure they could handle any repairs that pop up without breaking the bank. But to be honest, if they are trying to buy a 25k house and planning to use a tax return to make the deal work they are probably also strapped for cash. Any repairs would probably cause them to miss payments with you. So take a good look at the credit report and their financial situation. Good luck.
@Mubasher Riaz , You should require at least $5000 down for the land contract. If they want to use their tax return NEXT YEAR then just apply it to the balance.
Buyers are reaponsible for all repairs on a true land contract deal. You are acting as the bank. On top of the payment you need to charge them for property taxes and home owners insurance.
Heres the thing though. New laws have been put into place here in Michigan. They are almost illegal for a person to do unless its their primary residence or are licensed to do so. There are rules you have to follow to do a land contract. Look up the rules online on the state govt website but your best option to avoid legal issues is to hire a title company to handle the process.
@Jon W. , you can no longer run a credit check and negotiate the numbers. This is illegal and can put you in jail.
Everyone involved on this site and interested in land contracts, i highly suggest you look up Michigans new laws so you dont become the first example of the law being enforced.
In Aaron's scenario of getting $5K down on a $25k house (aside from the near impossibility of finding a buyer in a $16K-neighborhood who has $5K lying around): This means the buyer would have 20% equity in the house, so one of the main benefits of doing a land contract (versus a mortgage) is eliminated. Under state law, at 20% equity, you would have to foreclose on the borrower and would not be able to use land contract forfeiture provisions (more like an eviction).
Oceans of ink have been spilled here talking about the SAFE Act and Dodd Frank regulation that seller-financers have to abide by now, and the implementation varies by state, and there is still lots of ambiguity in how it will be interpreted and enforced. You can do some searches. That said, land contract selling to owner-occs the "old way" is still going very strong in MI (seems to be a lot of it in Grand Rapids), so you'd be in a very large company of wrong doers, LOL. Especially if you do 3 or less in a year, you can avoid some of the worst of it, but by all means find an attorney who does a brisk business in land contracts, to advise you.
@David Beard , i personally read the 38 page law that went into affect last year and is in affect right now for michigan. Im not going by hear-say. And yes there are LOTS of wrong-doers currently doing land contracts because they dont know the new laws. Even stricter laws go into affect in 2014. I have also personally sat with two lenders who have even stopped doing land contracts because of the gray areas and how the law was written.
I only speak on what I know as fact when I post things like this and am looking on for others because this is a serious law that Im sure the state is just waiting for the moment to make someone an example of.
BUT BY ALL MEANS, being from Ohio you should go ahead and tell everyone in michigan that land contracts have no legal reprocussions. Sense the sarcasm I hope...
Also Michigan no longer states a specific number in the laws written last year. I have not read the new laws that will be going into affect in 2104 yet.
I've talked at length with a local investor who specializes in land contracts in Michigan. In fact, he's a third generation land contract investor, has been president of the state mortgage broker association, held positions in the national mortgage broker association, is on the board of the Michigan realtor board and advises the state rule-making body on financial regulations. Which is all to say he knows his stuff and has been doing it for decades.
He's pulled completely out of land contracts in Michigan unless on commercial property for commercial business purposes. No more dealing with homeowners at all. The problems with homeowners are many, but a big one is that any foreclosure can be fought by the homeowner's attorney on the basis that you as the lender should have known that the buyer would not have been able to afford the home. The penalties can dwarf any potential profit you would have made.
He's not the only real estate investing professional who's left the land contract field in Michigan. I have no doubt some investors are still doing it, just as I know some are still not complying with the EPA lead rules from a few years ago (with the $37,500 fine). There's just a lot of risk involved and most investors don't seem to be aware of the landmines, which is understandable since the rule making process has resulted in information coming out sporadically, with some 180 degree changes. In fact, the situation now is different than it was in March of this year.
I guess it's one of those things like pulling permits, where some people choose to take their chances. Unfortunately with land contracts in Michigan most investors don't seem to know the rules or understand the magnitude of the penalties. Some one is going to be made an example of.
@Aaron Yates - I didn't intent to infer that there were no legal repercussions, just told him what the current landscape in fact looks like. You are commended for researching the issue and raising it in this thread, so let's remain friends. I'll bet you can talk to 10 attorneys that do land contracts in your state, and half probably don't even know what the new regs are about. Someone did a BP podcast this year -- as an expert -- on doing land contracts in MI (in volume), and there was ZERO mention in the podcast of these regulations, and when it came up in the comments, it was essentially stated that their attorney said it was nothing to be concerned about. So completely discounted in other words.
My essential point to the poster was to not be surprised if he hears nothing about these regs (or hears many conflicting opinions) when he talks to title companies, attorneys, or LC sellers.
Sorry @David Beard if i cane off a little harsh. But this is a topic i researched immensely. Didnt mean to respond rudely.