Land contracts were very popular in the late 1970s and early 1980s. Back then, installment sale contracts, sometimes called contracts for deed, offered more attractive financing terms over the higher rates and rigid qualification standards of institutional lenders.
Land contracts were very popular in the late 1970s and early 1980s. Back then, installment sale contracts, sometimes called contracts for deed, offered more attractive financing terms over the higher rates and rigid qualification standards of institutional lenders.
Land contracts began to disappear when loan requirements softened and rates dropped below 8%. But they have not vanished all together and, in fact, tiptoed back into the market in 2006. Now, in this bear market, they are an excellent investment strategy to employ
What is an Installment Sale Land Contract?
1. Land contracts or contracts for deed are a security agreement between a seller and a buyer.
2. The seller agrees to sell a property by financing the purchase for the buyer.
3. The seller retains legal title and the buyer receives equitable title.
4. The owner-carried financing can include an existing mortgage balance or the property can be free and clear.
5. Upon payment in full, the seller hands the buyer a deed to the property.
Why consider a land contract arrangement
1. If you buy a house for $20,000 and put a a buyer into the house with a $500 monthly payment, that’s a note worth approximately $57,000. Theoretically, you have $37,000 equity in the house.
2. Monthly cash flow of $500.
3. Since buyer has equitable title, it is their responsibility to maintain the property, pay taxes and insurance.
Land contract exit strategies
1. Buy a house, fix it, and put a buyer into it with a monthly payment that exceed your original investment amortized over the term of the loan,. Make sure you buy a property that that will be the same or competitive with local rental rates. You now have equity and cash flow. After 6-12 months, sell off the note to a note buyer for profit or wait until buyer’s credit is strong enough to refinance and cash you out.
2. Buy a house low, flip it to an investor at a higher price using the investor’s money for the acquisition. Then, set up a management company to clean the house, do minor fixes (carpet and paint), find a buyer and handle monthly management of the house for a 10% fee of the monthly payment. You made a spread on the house plus you’ve got a small monthly cash flow of management fees.
3. Buy the house and offer a potential buyer a rental agreement and an option to buy agreement. Buyer has the opportunity to make payments for 5-7 years to buy the house and at the end of the term, buyer pays one dollar for the house. Yes. that’s right… one dollar. For example, you buy a house for $20,000 in a neighorhood that supports a $650 monthly payment. At the end of 7 years, buyer has paid $54,600 in payments. You’ve just netted $34,600 or earned a 36% return on your money (assuming best case scenario with no additional costs). Now, imagine if you had 10 houses with a $200K investment. At the end of 7 years, you’ve pocketed $340,000 profit. Not too shabby.
In a bear market, a land contract is the perfect strategy to protect your money while earning a healtly interest, more than any bank could offer. Many of the most seasoned investors I work with are employing a land contract strategy as the best vehicle to build long term wealth.
No related posts.
{ 1 comment… read it below or add one }
I Like what I read here how can I the right paper work to get started with this.