Selling? Consider a Land Contract

Selling your home? Depending on your situation, you might want to consider a land contract. In the DC area, home sellers are still facing a depressed housing market. Regardless of the paper tiger pronouncements from the National Association of Realtors, people who live here know that the market is stagnant.

Sellers that place their home on the market face competition with bank owned properties that are for sale at reduced prices, homes put on the market by sellers seeking to complete a short sale (often marketed at a fantasy price), homes being sold by corporations and other sellers that are not upside down and just want to sell. The average days on market usually represents all of the homes for sale.

Faced with this situation, sellers need to be aware of every opportunity available so they can decide which way of selling the home will work to their benefit. The biggest factor behind the increasing days on the market is the fact that over 25% of the people who attempt to get a loan are turned down. The necessary credit score to get a mortgage has risen significantly. Despite information shared in the media, lenders have “overlays” that require a greater score and a squeaky clean credit history. It doesn’t matter if rates are low if those that wish to buy your home can not get a loan.

Another factor sellers face has to do with the appraised value of their home. Lenders will only approve mortgages for a percentage of the appraised value. If the appraised value is less than the contract price, there are a few options and none of them favor the seller. The buyer can opt to make up the difference in cash (in essence use their personal funds to pay more money than the lender has told them the home is worth), the seller can lower the price and if all that fails the contract can be declared void (legal term meaning everyone will act as if it never happened).

Consider a land contract. There are pros and cons to a land contract.  A land contract is a private, contractual agreement between a buyer and a seller. Due to the nature of the contract, sellers do not have to comply with the property-condition requirements that are usually part of a sale funded by a mortgage.  The seller decides upon whom to sell the property to in the agreement.  This creates an opening for people who can not get a loan through traditional methods.  These buyers can not shop around for loans seeking low-interest rates so the seller can demand a higher interest rate and probably a higher price than if the home were being financed by a third-party.  The title does not transfer until the loan is paid in full. This means that the seller retains legal ownership with the right to evict the buyers if they default on the payment plan.  If the buyer defaults, the seller keeps all the money paid.

There are other factors that must be considered. Land contracts do not provide a lump sum payment at the time of the contract.  The seller becomes the lender.  If you need the cash from the sale of your home to buy another property, this may not be the best way to proceed. If the full proceeds are not needed right away or if the market is so depressed there is no other way to move the property, a land contract may be the way to go.  The other point that must be considered is if the buyer stops paying, the seller must evict them and re-market the property.

Ideal candidates for this process include but are not limited to people who inherit property and want to sell it in a depressed market,  people who do not need a lump sum payment right now and people facing a financial crisis. You do not have to pay off your home to sell it via a land contract.  Land contracts and contracts for deed provide a  way for people to sell their homes and owner-finance them and not pay off the existing mortgage. A land contract establishes a purchase price and mortgage terms that the buyer pays to the current owner. If the seller currently has a mortgage lien, the seller continues to pay his monthly mortgage payment to the mortgage company.

Everyone’s situation is different.  If you would like more information about land contracts, CONTACT ME. My name is John MacArthur. I encourage you to experience the difference.

2 thoughts on “Selling? Consider a Land Contract

  1. In this process what mechanisms are in place to protect the buyer? Is there any way to guarantee that the payments made to the seller are actually applied to an existing mortgage instead of the sellers vacation fund? I think this a a good creative way for sellers to move a home, but as a buyer I’d be nervous about making sure the monies were going to the appropriate place(s) because if the seller does default, I’m guessing there is very little recourse for the buyer as they’d be way down the list of junior lien holders. Do you know what recourse the buyer would have in that situation? Thx.

    • James,

      If I were representing a buyer in the purchase of home through the use of a Land Contract, I would make sure that they had the “contract” examined by a real estate attorney. The Land Contract is between the buyer and seller. If a buyer has questions about any real estate transaction, I would recommend they seek appropriate legal counsel.

      Land Contracts are nothing new. They represent another way of transferring property. In a depressed market, they may represent the best chance a buyer has in making a purchase.

      Risk exists on both sides of every real estate transaction. Using the advice of an attorney can reduce but never eliminate risk.

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