Selling on Contract - Why would you do that?

Question

I'm struggling to see the benefit to a seller in selling to someone on contract. Are there tax benefits? What other benefits? Seems to be popular in my area,  actually have someone I know I could do this with but I don't know why I would. Any suggestions?

Brad Pickett · Answer

Generally in the REI world selling on contract would mean either Contract for Deed (AKA Land Contact depending on where you are from), or owner finance.  There are many more that could fit in this general terminology also (subject 2, lease option, sandwich lease, option, etc), however contract for deed and owner finance are usually what people are referring to IMHO.  Both of these have great benefits for the seller:

Contract for Deed:

• seller keeps deed (it is similar to buying a car, your equity position increases with more payments)
• in the event of default foreclosure CAN BE (isn't always) easier than a traditional sale
• Reduced closing cost
• reduced tax burden 
• buyer pays taxes insurance repairs maintenance etc
• close in a coffee shop :) (non-judicial states)
• You become the bank so you can make considerable amounts in interest over the term of contract

Owner Carry:

• Everything is the same EXCEPT the deed transfers to buyer at closing.  So this is LESS advantageous to the seller and better for the buyer.

In both of these types of transactions I would recommend a long term escrow where as a title company or other non interested 3rd party handles all payments, interest calculations, and monies.  This way in the event of a dispute the payment histories will be clear and unbiased.

Hope this helps :)

Samuel Sedore · Answer

Agree with @Doug Pretorius

Also would like to point out, in Canada specifically more then the U.S, average home price is 350k here and you need 20% for an investment property from the bank. Not sure on U.S lending policies for down payments.

Seller financing allows less than 20% down and no qualification. If you have bad credit, new job, self employed, etc. Even with an owner occupied at 5% down payment, qualification can still be difficult for most with a maximum of 33% and 41% GDS and TDS ratios

Doug P. · Answer

I don't know about the US. But here in Canada I can buy say a $400k house for the mortgage balance of $360k with a loan at 3% = P&I of $1,704. Then turn around and sell it on contract for the market value of $400k with 3% down at the banks posted rate of 6% = P&I of $2,482.

How everyone benefits.

SELLER: Gets out of the property they couldn't afford and couldn't otherwise sell.

BUYER: Gets into a nice house with competitive payments and a low down payment.

INVESTOR: Makes $40k on the sale of the property plus $778/month until the buyer pays off the loan.

Michael Fundaro · Answer

@Rebecca B. a big benefit of seller financing is the flexibility in negotiations it allows for.  100% financing comes to mind here.  With the right negotiations, it can be a lot easier to get 100% financing from a seller than from a bank. Granted, that only works when the seller owns the property free and clear.

That's just one example.  Basically, there are times when it can be advantageous, and times when its not... it really depends on your situation and the deal you are working on... but I certainly wouldn't rule it out completely as an option.

Bill Gulley · Answer

First, seller financing never increases the value of real estate, so don't expect to pay or charge more, now we have predatory lending laws, so the old scammer ideas need to be put away.

A seller gets the sale price, down payment and they earn interest, usually more than they could get if the invested the sale proceeds. Gains on the sale are tax deferred, paying taxes on the amounts received over time and that allows your tax liability from the sale to earn interest as well. The seller makes more money from interest.

Other old news is the contract for deed arrangement just filing a deed to take a property back, this is now seen as circumventing foreclosure laws, with residential owner occupied buyers you can easily violate the Dodd-Frank and SAFE Acts, ability to pay rules apply and terms of the financing must be compliant, unless you're selling your residence or qualify for state exemptions, however, predatory aspects still apply, so you might as well conform.

CFDs were my favorite to buy or sell even 5 years ago, not today, laws have changed, there are a string of issues from proper title being conveyed, to insurance issues, to collection issues, that you might as well do a note and deed of trust.

I might suggest you go to my profile, then go to my posts on seller financing, note issues, wraps, contract for deeds as there much more posted than I can possibly rewrite here. Just the past couple years, further back Dodd-Frank wasn't hammered out as it is more recently.

TIC Agreements can have financing and buy-sell aspects that are made privately that require features that reduce the foreclosure burden but any buyer can always force a judicial foreclosure or partition suit, That's a risk lenders accept. :)

Rebecca B. · Answer

The particular scenario I'm asking about would be where I buy the house for cash. The buyer then buys it from me with monthly payments. Is there any advantage for me to do that. I see why the buyer would want to. But since my plan is to purchase rental properties I don't see the benefit to me in doing this. I just wondered if I'm missing something.

Brian Gibbons · Answer

sub2 = subject to existing financing

land contract - contract for deed - put some down, have some kind of ownership, seller holds deed until cfd buyer gets new loan

note plus deed or not plus dot deed of trust =  seller financing, usually free and clear

TIC = tenants in common agreement - you share ownership

There are more...

@Bill Gulley

Rebecca B. · Answer

I don't see a real benefit to me. Although sellers usually pay that in reality the price of the house is bumped up to accommodate it. The buyer pays really. I'm interested in what could be the benefit to me. I don't want to dismiss it outright if it's potentially a winner.

Valerie Zutavern · Answer

I think people do owner financing because you can leave the agents and bank out.

Selling on Contract - Why would you do that?

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