Selling on “land contract”

Once you’ve won a real estate tax lien auction, waited out the redemption period, and acquired the title to a house,  the obvious question is, “what do you do with it now that you’ve got it?” First of all, there’s a very good chance you’re going to need to do some renovations before you do anything. But after that’s done, then you do have a few options, all of which revolve around either renting it, or selling it.

Selling a house however, can take many forms. The traditional way of selling a house–getting a real estate agent, listing it on the market, and selling it to someone who is capable of qualifying for a bank loan, is a lot harder than it used to be. First of all, the houses that are typically acquired at tax auction are in marginal neighborhoods and in need of repair, and these are going to be hard to sell on a conventional basis. There is an option though, and it’s called “land contract.” Land contract is simply a seller-finance arrangement, where the buyer buys the house directly from the seller on terms, and makes payments direct instead of going through a bank. Sometimes you may hear this called “owner finance,” or other variations such as “rent-to-own”. The term “wraparound mortgage” is also frequently used, although this term applies only if there are existing underlying mortgages, which in the case of a house bought at tax auction, does not apply.

Essentially, all you’re doing is letting the buyer pay you off in installments. It’s perfectly legitimate and legal, by the way. Land contract got a little bit of a bad rap lately, with sellers selling houses on land contract that were already heavily mortgaged. Sellers then defaulted on their underlying mortgages while still collecting payments from their buyers. This of course, borders on the fraudulent. But, since you don’t have any underlying mortgages, there is less risk for both buyer and seller.

So, if you’re just taking in payments every month, why not just rent it? Well, your cash flow is about the same. The difference is that when you are selling on land contract, your buyer has a greater commitment to the property, since they are gaining an ownership stake. The buyer is also responsible for taxes and insurance, and maintenance as well.  And as an added bonus, you’re charging interest at above-market rates.

There are many buyers out there, especially in today’s lousy economy, who are looking for land contract deals. Credit is harder to get than ever, and so an owner-finance deal is attractive. You as seller do not have to adhere to the same strict credit requirements as a conventional lender. Naturally, you will want to exercise some due diligence, but you can go more by your feelings than will a bank. Expect most applicants to have some spotty credit, and don’t set the bar too high. There are a few investors who set their own personal credit requirements to be equivalent to the bank’s, and they are almost always disappointed. It’s obvious why–if a buyer has perfect credit, they don’t need a land contract deal from you, they can go to the bank directly and get money at a lower rate.

For more information, you can get a copy of my book, “Learning to play the real estate tax auction game” at Amazon.com.

Tax liens in Illinois paying 36 percent?

There is a lot of excitement in the tax lien community over investing in Illinois, because there is a potential for a 36 percent return. Illinois is a tax lien state, which means you buy tax liens at auction, but it works a little differently there. Here in Indiana, for example, the interest rate is the same, and you bid based on a starting amount equal to the back taxes, and highest bidder wins the lien and the right to collect interest on the amount paid.

But in Illinois, it works backwards. Instead of bidding based on the amount of the back taxes, you bid on the amount of penalty you are willing to receive, starting at 18 percent and going backwards. The 18 percent is good for six months, which makes the maximum potential 36 percent a year.

Now this is quite a bit more than the ten percent you get here in St. Joseph County, so why aren’t I running across the border every year? Because everything is not as it seems. At first glance, it looks like you’re going to go to the auction, and walk away with 36 percent on your dollar. In reality, almost nobody ever gets that. That’s because you’re bidding on the percent return. The bidding starts at 18 percent, the next bid might be 16 percent, and it can–and often does–go down to the single digits. It can get very competitive, especially in Cook County (Chicago).

If you attend one of these auctions, you may even see the bizarre occasion of a zero bid. Zero!? Why on earth would anybody place a zero bid at a tax lien auction? The theory is that doing so prevents anybody else from outbidding you, and you have a claim on the lien in the event that the property is not redeemed, and you will gain title. This strategy is sort of like playing the lottery–if you buy enough liens at zero percent, eventually a few will fall through and you’ll get title. Ultimately though, it’s tying up a lot of money in the meantime. The fallback of getting some interest on your money in case the owner redeems is a better position in my opinion.