Whether you’re new to real estate investing or looking for a creative way to sell or buy property, you need to be aware of the many options you have. A land contract is one of the most flexible ways for buying and selling real estate. Essentially, a land contract is a private agreement between the buyer and seller that doesn’t involve a third party lender (no banks are involved).
Before we go any further, there are provisions from the Dodd-Frank Act that greatly restrict who can engage in a land contract. These mostly concern the seller but you should be aware of them as an investor. The Dodd-Frank Act might not apply if the seller does not sell more than one property using seller financing during a 12 month period. Also, the seller cannot have built the property and cannot sell it through a legal entity such as a partnership, corporation, or LLC. These regulations are still going through the interpretation stage and could possibly change in the future. It’s strongly recommended that you consult with a real estate attorney before becoming involved with a land contract.
Because a land contract is strictly between the buyer and seller, it can be written to benefit both without consideration of lender requirements. The use of a land contract became very popular back in the 1970s and early 80s when interest rates soared as high as 18% and many people couldn’t qualify for a loan. As lending requirements softened, the use of a land contract became less popular but never completely went away. The land contract has seen a resurgence in popularity since 2006 when loan qualifications tightened significantly.
Basics of a Land Contract
Although a land contract can be written in many ways to benefit both the seller and the buyer, there are a few things most have in common.
- A land contract (also called a contract for deed) is an agreement between a seller, called a vendor, and a buyer, called a vendee.
- The seller agrees to sell the property by carrying the contract (seller financing).
- The seller retains legal title until the full purchase price has been paid. The buyer gains equitable title, meaning he or she has ownership in proportion to the amount that has been paid.
- The seller can have an existing mortgage on the property, in which case the seller financing becomes known as a “wrap around mortgage” because the seller must continue making payments on the existing mortgage.
- Or the property can be paid off in full in which case the seller pockets the entire payment made by the buyer.
- Upon full payment of the purchase price and interest, the seller signs over the title for the property to the buyer.
Land Contracts are Great For Investing
As an investor, you can use a land contract to either purchase a property or sell a property. Both have benefits. Clearly, you won’t find a lot of sellers looking to carry the contract but they are out there. Typically, what you want to look for in a seller that can be motivated to carry a land contract is:
- Has a non-conforming property that most lenders won’t make a loan for.
- Wants to defer taxes through installment payments.
- Wants a return on his or her money that is higher than money markets.
- Wants to make a sale for a higher price than an appraisal will support.
- Wants or needs a fast closing.
As a seller on a land contract, those are the same benefits that you’ll receive. As a buyer on a land contract, you can benefit from:
- Not needing to qualify with a lender.
- Avoiding all of the fees that major lenders charge to originate a loan.
- Down payment flexibility.
- The length of the contract, interest rate, and amount of payments is negotiable.
- Fast closing.
As an investor, if you haven’t looked into a land contract, now is the time to do it. State laws governing these transactions vary so it’s always a good idea to consult with a competent real estate attorney.
If you want to work directly with me on the land contract business model or any of the other investing models that have proven highly profitable, please join me at www.wendypatton.com/what-is-wendy-pattons-inner-circle.
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Several times each week, I make the most current real estate investing information available to readers. This time, it’s about the land contract investing model 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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