Should a Home Seller Accept a Land Contract?
- December 28, 2016
- W. Jay Brown
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On first blush, a land contract can look attractive to a seller. Consider “Sam Jones” who owns his $100,000 home without a mortgage. He’s retiring and moving away and the prospect of a $10,000 down payment with the remaining $90,000 to be paid along with 7% interest sounds good. Not only can Sam get paid for his home, he can earn a healthy rate on the balance of the contract. Sam’s realtor is in favor of the sale. It sounds good — what could go wrong?
What sounds good in theory often doesn’t work out as planned. First, Sam really doesn’t receive the down payment. The realtor who produced a purchaser is entitled to their commission. After seller closing costs, there is little if anything left for Sam. Suppose then that the purchasers move in and simply don’t pay. At this point, Sam has to start a forfeiture. This takes a minimum of four months from start to finish. All that time, the purchasers are in the property without paying on the land contract. Sam finally gets the house back and has to start all over. After paying the real estate taxes the purchasers did not pay, he’s farther behind than when he started.
There’s only one guaranteed winner in Sam’s deal – the realtor. It is not surprising to me that a realtor may recommend a land contract as a way for a real estate seller to make a sale. This can be a savvy move by a realtor who’s able to get their entire reward without having to take the risks inherent in a land contract.
Having many times helped clients pick up the pieces of a failed land contract, I really caution people to think long and hard before selling on land contract. To me, there has to be a significant down payment which puts significant funds in a seller’s pocket. It has to be enough to where the seller has already received the carrying costs for the 5 months it takes to get the home back, plus enough left over to make getting the property back at least an OK proposition.
If there simply is no large down payment, I think a seller is usually better off renting the house and providing the tenant an option to purchase. Usually, the seller can get a premium rental rate for the property by committing a portion of the rent to be used toward a down payment. Tenants who aim to purchase the home are more likely to take better care of it.