What is the worst?  Since you are going to stay in control, keeping the home insurance and taxes paid, you are not in jeopardy of losing the home to a fire or of having the property tax authority taking over your home because of an unpaid bill.  That would be really bad.  YOUR buyers have the ability to pay you slowly, sometimes nothing for a while.  But you will keep your payments up; therefore, your interests in the home are protected.

The most realistic and likely negative thing that could happen goes something like this:  You meet a nice family, down on their luck and in need of help.  You look at their credit and hear their story – although they lost a home to foreclosure 8 months ago, their story of a job loss checks out on the tax returns, and his new paycheck stub says that they can again afford to make a payment. You negotiate a deal.  So far so good.  You close on the land contract and await your first payment, which you expect to receive the first of the following month.

It arrives with coffee stains on it and slightly torn on the 14^th.  You breathe a sigh of relief and pray that this is not a trend.  Your prayers are answered, but not in the way you imagined.  Next month you get no payment.  After talking with the nice man, you are convinced that he will pay you something soon.  Then half a payment comes.  Then nothing for a while.  Then more time, and nothing.  Then a payment.

Then, you get nothing for a few months, and they do not return calls.  You get out the Michigan Bar Association white paper you read six months ago and decide to get going on the process.

Three months later, the buyer is forced to leave the house.  You feel badly for them, but you remember that your profit motive is not wrong and you also remember that you offered help along the way more than once.  Your purpose was to serve.  It just didn’t work out.

The next morning, you muster the courage to walk into the house for the first time since handing over the keys and as you open the door . . . .

. . . I’ll let you write your own nightmare here.  In fact, I would have to make one up myself, because other than a few missing appliances and some ruined carpet and paint, I have not personally experienced or heard any actual “horror” stories first hand.  I’m 38 though, and someone older and wiser might recall stories (legends) from the 80s – the last era where Land Contracts gained a ton of market share.

We need to be aware of risks and we can do A LOT to avoid them.  We cannot control other people, however.

Understanding that everyone is motivated first by their own best interest (you included) it is possible to put a deal together where the above is really not all that likely.

Most of the time, even if the buyer walks away from the home, if you have kept a good rapport with them, they do it quietly.  If you collected a few thousand dollars up front for a down payment and you made some money along the way in their payment to you, then you will have enough money to go into the home and get it ready for lease or list again.

It’s not personal, it’s business.

Keep reading: tomorrow we talk about the Due-on-Sale Clause – you won’t want to miss it.

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.