Land Contracts – Part I
by Evan Vanderwey on 15/02/10 at 7:45 am
Many home sellers are using Land Contracts in this market to sell their homes. This series of posts should help you make a good decision about whether it’s right for you.
The appeal of this type of sale are multi-faceted. Here is a non-exhaustive list of benefits to you as the seller in a Land Contract scenario:
1. Buyers are less discriminating. Buyers who want to buy a home on land contract are likely doing so because they cannot get a mortgage for whatever reason. The most common one being a low credit score or a recent foreclosure or bankruptcy. These legal actions take most people a few years to recover from, and in the meantime they still need a place to live. It is possible to evaluate these potential buyers to determine if they will be able to get a mortgage in the near term. Until then, they’ll be negotiating less aggressively. You are not taking advantage of them–you are offering them something they can’t get in “open market.”
2. Sale price can be higher. Because you are not only presenting your home on the open market, even though you may have your home listed with a Realtor, you do have the right to ask a higher price. Since you are providing the financing for the buyer, you ought to be compensated for that risk in either a higher price or a higher-than-market Land Contract rate – or both. Buyers who are looking for a land contract can’t buy just any home on the market. They are looking for a seller who is willing to sell in this way.
3. For the buyer, the housing tax credits apply. This is a huge motivator for them as well as a way for you to collect some down-payment money. Your selling to them in this way is the only reason they are collecting the tax credit. The deal can be structured for them to pay a portion of the credit to you as a retroactive down payment. The tax credit money can also be used by the buyer to clean up old, nagging credit bills. This increases their credit score and speeds up the time frame for them to be approved for the mortgage that will pay you off.
4. Housing Tax credits require a three-year minimum stay. If your buyer buys from you before the housing tax credits go away, then in order to keep the full credit, they must stay put for three years. You are less likely to see them walk away from the deal in the early years.
5. The home you currently live in, as yet unsold, is the last remaining detail keeping you from making the buy of the century in today’s housing market. Since selling your home would likely mean getting no money from the sale anyway (or bringing money to the closing for many reading this in Mid Michigan), a land contract sale could mean that you are finally free to look for a home in this very attractive real-estate market.
What I like about a Land Contract sale is that it puts under-utilized resources (unsold homes) together with real needs (less qualified borrowers) in a free market. Both sides benefit. The housing market improves as well, and in turn, the entire region improves. A higher price (on average) is recorded for the home. Another home is not listed for sale in the open market where there is already too much inventory. A buyer that would not otherwise qualify for a home purchase can now buy one. When it works, everyone wins. Anyone seeking to sell their home in today’s market ought to at least consider this option.
Check out tomorrow’s post for helpful hints and things to remember before signing on the dotted line.
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