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.