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land contract

landcontractSometime ago I wrote a post about land contracts Over the last year, I have referred more people to that post than any other.

A land contract is a financing tool between the buyer and the seller. The seller agrees to sell his property to the buyer at a set price, agreed upon down payment, monthly payments, interest rate and the length of the contract. The seller is financing the property for the buyer.

A land contract is not a perfect tool, but it can be a win- win situation in many cases. Let me share an example of one of these win-win situations.

A seller, who has retired, has a property that has been used as a hunting camp over the years. His son is not interested in the property, so the seller decides if no one is going to use it, it may as well be sold. He understands the market is tight because of the housing crisis and he may have to accept less than he thinks he should or wait a long time till just the right buyer comes along. He has no real need for the proceeds from the sale and will likely buy a CD from his bank with the proceeds.

A buyer with good credit, a good employment history and a down payment is looking for just such a property. He is looking for a place to get away for the weekend; his own place in Michigan’s north during hunting season.

He approaches his bank about a possible loan on the new purchase, but learns his bank is not willing or able to make loans on “investment property”. He finds another lender, but unfortunately, discovers the rate and other conditions are much more unattractive than expected.

The buyer and the seller come to agreement on the price and terms of the sale. A land contract is drawn up. The buyer presents the seller with a down payment, agrees to make monthly payments with interest, and pay the entire property off in seven years.

The buyer wins because he is buying a quality property with flexible financing at more favorable terms than the bank. He can now begin to enjoy the property.

The seller wins because the property is sold. He has a responsible buyer, has a monthly income, and earns a higher rate of interest than if he had the CD. He knows better than anyone else what the contract is secured with.

As I said, a land contract is not always the best tool to use, but under the right situations, it can make a win-win deal.

Written by Dave.