Using Land Contracts to Get Rich

By: Real Estate Ninja

USING LAND CONTRACTS TO GET RICH

What is a land contract or contract for deed?

A contract used in a sale of real property whereby title to the property remains vested in the seller until the buyer who receives the right to possession has paid in installments over a long period of time a preset amount or all of the purchase price and upon default by the buyer all payments may be forfeited. Also known as a Conditional sales contract, an Installment sales contract and a Real property sales contract.

I've used land contracts to buy apartment buildings, single family homes and land. I do recommend buying real estate on land contracts but not selling on them. Using a land contract allows you to use leverage when you are buying a piece of real estate. This strategy gives you time to come up with the rest of the money needed to pay for the property, since normally you'd only have to come up with 10-20% down and most land contract transactions don't require a person to have good credit.

If you decide to sell property on a land contract, beware of the fact that if the buyer does not honor his end of the deal, you will have to foreclose on them. This will NOT be a simple eviction out of the property. This is because, when you're doing a land contract, you are giving the buyer equitable title. As the buyer makes payments, he actually owns equity in your property, thus requiring you to foreclose in order to legally separate them from the equity that they have paid for. Not a good strategy for selling, unless it's a property that you simply can't sell to anyone, for some reason.

It is important to note that a land contract is really a mortgage on the property. It's a seller-financed mortgage, which can be refinanced, just like a regular mortgage. Land contracts these days are for much shorter terms than in past decades. The average term for a land contract is anywhere from 2-5 years with a low interest rate, but is totally up to the parties involved. I always go for the longest possible term. This give time to get the property, make improvements and decide if I want to refinance or flip.

Here's one of my past deals. I bought small apartment building from a worn out landlord using a land contract. I negotiated the purchase price to $500,000, the down payment down to $1,000 just enough to bind the contract and because of all of the work I had to do to get the building running properly. If someone didn't step in to turn things around, the seller would have been foreclosed on soon. Fixed up the units by using the proceeds from the few tenants that were paying. Moved several new tenants into the rehabbed units, stabilized the rents then sold the building to another investor for $700,000.

I was able to get control of the property with almost no money out of pocket, use the collectable rents to fix up the building and sell because of the flexible financing terms of a land contract.

CAUTION!

You have to be very careful when drafting or signing a land contract.

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