A land contract or owner financing are two terms for the mostly same deal when the seller provides financing to the buyer. There are variations such as when an existing mortgage is still on the property. The buyer must cover both the existing mortgage and the seller’s profit. These are called wrap around mortgages.
The land contract method of financing real estate investments was particularly popular back in the late 1970s and early 1980s. At the time, new mortgages were carrying extraordinarily high interest rates. The high interest rates drove the monthly payments up to a point that many buyers couldn’t qualify for a mortgage. However, the houses for sale had much lower interest rates on existing mortgages. Seller’s could make a profit on the sale of the house and offer lower interest rates and still earn a few extra percentage points after paying the underlying old mortgage.
A Land Contract Today
Today’s reasons making a land contract a good investment method are only slightly different from from the past. Today people aren’t qualifying for a mortgage, not because of high interest rates, but because the standards have been seriously tightened. Also, the underlying interest rate on an existing mortgage is likely to be higher than current interest rates. Still, a seller can often charge a slightly higher interest rate than the existing rate to make a small profit on every installment payment.
Here is an example of how a land contract can work. The seller and buyer agree on a sales price of $100,000. The buyer makes a $10,000 down payment. The seller carries the remaining $90,000 at 6.5% interest (also negotiable). The outstanding mortgage is $50,000 at 5%. The monthly payment on the old mortgage is $268.
The seller makes 6.5% interest on the $40,000 of equity he has ($90,000 – $50,000). He makes 1.5% interest on the $50,000 balance of the old mortgage. In the end, he pockets $299 each month for selling with a land contract.
One thing that has changed since the land contract was a popular financing option back the 70s and 80s is that Congress passed the Depository Institutions Act of 1982. This effectively placed ‘due on sale’ clauses in most of today’s mortgages. This is important if the existing mortgage is backed by a government entity because they will enforce the clause. However, private lenders rarely enforce the clause as long as the monthly payments are being made.
Benefits for Buyers and Sellers with a Land Contract
With a land contract, the rights of the buyer really are no different than with a traditional mortgage. With a land contract, the buyer has the right to take possession, to the enjoyment of the property, to the exclusive use of the property, and to rent it or sell it.
With a land contract, the seller has not been paid in full and therefore has more rights than in a traditional sale. The land contract enables the seller to receive a typically higher sales price and no appraisal. Although buyers are advised to obtain an appraisal. If income from the sale is taxable, the seller will be able to defer the taxes. A land contract creates a monthly income for the seller. The rate of return on the seller’s money is higher than most other investment options. If the property isn’t conforming, the land contract is an easy way of making the sale.https://wendypatton.com/realestate-qa-lease-option-lease-purchase/
Today, you should consider a land contract when investing in real estate or for your personal residence.
Besides reading this article about a land contact, you’ll want to read this other useful information that I offer free. Please take advantage of it today.
Several times each week, I make the most current real estate investing information available to readers. This time, it’s about a land contract but the information I provide changes constantly to stay current with the market. Be sure to check back at: www.wendypatton.com. Also, get started learning how to do NO CASH lease options on real estate by picking up a copy of my bestseller book: Investing in Real Estate with Lease Options and Subject-to Deals.
By Wendy Patton
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