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Land Contract as Seller

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  • Avatar StrabismusBusiness 
    Participant
    Status: Physician
    Posts: 8
    Joined: 12/01/2017

    Has anyone sold real estate via a land contract [seller financing]?

     

    We have inherited a parcel of lake front property 2 states away. The un-developed land is surrounded by homes; I would expect a neighbor would enjoy expanding their property. I’ve done some reading on the topic and would be interested in the forum’s experience and advice.

     

    As far as terms, it seems 10-20% down with a 15-20 year amortization at 8-11 % is average.  The deed is transferred once the contract is paid, and the deed stays with us if the buyer defaults.

     

    Thanks in advance.

     

     

     

    #179524 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4191
    Joined: 05/13/2011

    Seems like a great deal for you but not them. I’m not super familiar with them, but every time someone calls in to Dave Ramsey about buying a place with a land contract he warns them against doing it.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #179528 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 389
    Joined: 06/18/2018

    Sure, if you can somehow swindle someone into paying you 2x or more what they could get the loan for from any of a myriad of lenders, go for it. I suspect you’ll get laughed out of the room for offering such terms, but I guess you don’t get what you don’t ask for.

    Probably easier just to sell it and be done with it. Take your windfall and invest it in something you know.

    #179531 Reply
    Avatar StrabismusBusiness 
    Participant
    Status: Physician
    Posts: 8
    Joined: 12/01/2017

    ‘Swindle?’

    Although amortization is over 15-20 years, these loans are usually paid off or refinanced within 5 years. Giving a potential buyer who cannot find a traditional bank loan the option of seller financing seems to fair to both sides. I would be getting a guaranteed return with a higher rate as there is more risk of the buyer defaulting.

    #179555 Reply
    Avatar CREGuy 
    Participant
    Status: Other Professional, Spouse
    Posts: 34
    Joined: 01/16/2018

    Typically land contracts really only come up when the Buyer won’t/can’t qualify for financing from a bank.  Occasionally there are other reasons (to keep extra debt “off the books”) or ease of financing (no appraisals, no red tape from the bank, etc.).  For the most part though, it’s because of the Buyer’s ability to borrow, which is also typically why the interest rates are higher.  I have a land holding company (all vacant undeveloped land, mostly recreational).  We sell about 1/3 of our properties on land contract, many times just because they’re relatively small amounts (15-40k), and it’s for vacant recreational land which is harder to find financing for.  We set our interest rate fairly high as our preference is to simply get the cash up front.  I can earn more than 9% on my money elsewhere without the headaches of a LC, but like I said, we offer it simply because we know that getting a small loan for vacant land can be a PITA and may deter a buyer.  However, I would certainly always prefer to just sell a property outright and be done with it.

     

    You’ve got the mechanics of the LC down, although typically (at least in our case) we have a balloon due after 5 years or so.  We’ll amortize it for longer, but I don’t want to hold a note for 20 years to get paid.  It’s unclear why you want to know about LCs, but I wouldn’t look at it as a preferred method of transferring the property.  Sure you’ll get a little interest, but the headaches of tracking payments, chasing payments down if necessary, the tax implications and separating interest (ordinary income) and capital gains (principal) and everything else that comes with it is a pain.  It’s better to just get the cash today and invest it in other vehicles.  If it’s needed to facilitate the transaction, then go for it, but again it wouldn’t be my preferred method.

     

    #179558 Reply
    Avatar StrabismusBusiness 
    Participant
    Status: Physician
    Posts: 8
    Joined: 12/01/2017

    Typically land contracts really only come up when the Buyer won’t/can’t qualify for financing from a bank.  Occasionally there are other reasons (to keep extra debt “off the books”) or ease of financing (no appraisals, no red tape from the bank, etc.).  For the most part though, it’s because of the Buyer’s ability to borrow, which is also typically why the interest rates are higher.  I have a land holding company (all vacant undeveloped land, mostly recreational).  We sell about 1/3 of our properties on land contract, many times just because they’re relatively small amounts (15-40k), and it’s for vacant recreational land which is harder to find financing for.  We set our interest rate fairly high as our preference is to simply get the cash up front.  I can earn more than 9% on my money elsewhere without the headaches of a LC, but like I said, we offer it simply because we know that getting a small loan for vacant land can be a PITA and may deter a buyer.  However, I would certainly always prefer to just sell a property outright and be done with it.

     

    You’ve got the mechanics of the LC down, although typically (at least in our case) we have a balloon due after 5 years or so.  We’ll amortize it for longer, but I don’t want to hold a note for 20 years to get paid.  It’s unclear why you want to know about LCs, but I wouldn’t look at it as a preferred method of transferring the property.  Sure you’ll get a little interest, but the headaches of tracking payments, chasing payments down if necessary, the tax implications and separating interest (ordinary income) and capital gains (principal) and everything else that comes with it is a pain.  It’s better to just get the cash today and invest it in other vehicles.  If it’s needed to facilitate the transaction, then go for it, but again it wouldn’t be my preferred method.

     

    Click to expand…

    Yes, the thought was that LC would facilitate the transaction as this will likely have approx 200K valuation.

    I can earn more than 9% on my money elsewhere without the headaches of a LC

    I’m looking for diversification from stocks and I would gladly take a guaranteed 9% return.

    Thank you for the insights regarding taxes and the hassle!

    #179580 Reply

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