Land Contracts: Could They Be The Most Valuable Tools In Your Toolbox?

Across the country traditional financing has slowed. For real estate investors financing sales on land contract is now a great tool to have in your toolbox. Using a contract to sell your real estate can help open the door to more potential buyers, increase flexibility in negotiations and create cash flow in the process. Not all contracts are created equal. Here are a few things to remember when selling your property on land contract.

Down payment: The higher the down payment the better. That goes without saying, but you have to remember for every dollar your prospective buyer puts towards a down payment, that dollar represents another reason why the buyer will want to pay you each month without hassle.

Monthly Payment:  There are two schools of thought when it comes to monthly payments. Many property owners prefer to structure monthly payments like 30 year mortgages, while other contract holders prefer larger monthly payments and shorter contracts. Whatever you choose, remember, a contract is a long term commitment and the two parties need to work together for the life of the contract.

Interest Rate:  Another option that increases your flexibility as a seller is your ability to set the interest rate. Be sure to follow your state’s laws on interest rate caps to ensure your contract is enforceable.  In my next post I will show you how a higher interest rate can increase your return, and help the buyer own the home in a shorter time frame. This is a win-win for you and your buyer!

Balloon Payment:  Have the purchaser make 60 monthly payments and then require them to pay the balance owed to you on that sixtieth month.  Sounds great, right? The problem with this model is that 90% of the contracts you write with a balloon either default or have to be re-written under new terms. Don’t assume just because you have a balloon payment in the contract, you are guaranteed to get that balance.  A balloon payment works in some circumstances, just be sure when you write it into the contract you have a contingency plan in place for the contracts you own.

Qualify, Qualify, Qualify:  Treat the land contract sale as if you are qualifying the buyer for a bank loan. Do credit checks, ask for tax returns, pay stubs, and check references. More legwork up front, means less headaches after the contract is in place.

Use a title company:  While this may seem simple and a no-brainer, you should always work with a reputable title company to ensure that your contract is in compliance with the SAFE Act. Furthermore, there are documents required in every state to ensure your contract is properly recorded, properly structured and enforceable. The small fee they charge to close a contract is worth piece of mind. Always protect your name and your integrity.

Following these principles will help you construct a contract that works for you, your buyer, and builds a solid asset for your business while creating passive income.

Photo: Robert S. Donovan

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.