In part I of this three-part series, we talked about how real estate investing is changing. In part 2, we discuss a key opportunity for implementing that change: land contracts.
You don’t have to look far to find experts in the financial industry declaring today’s real-estate lending process badly broken. The evidence is extensive: the over-subscribing of worthless mortgage securities, the resulting meltdown, the foreclosure crisis, the robo-signing mess. It’s like watching a train wreck in slow motion.
How are real estate investors supposed to continue their efforts to develop equity and a strong financial foundation when the process for borrowing is so horribly mangled? One answer is to turn to land contracts, which DBNR frequently uses for its investments.
Just like it sounds, a land contract is an agreement between a buyer and a seller in which the seller agrees to give full and equitable title to the buyer once they meet certain conditions. These conditions could relate to payments, payment schedules, occupancy, repairs made, payment of back taxes and utility bills. Each contract is as different as the property it relates to.
For instance, you can set up your land contract so that the buyer makes payments, but the seller still gets the depreciation deduction. The seller hands over title at some point in the future when the buyer has fulfilled the conditions set forth in the contract, and that’s done through the traditional escrow process.
Land contracts are becoming increasingly popular for private investors who don’t want their deals mired in the quicksand of the financial industry mess. While it’s hard to estimate how many such contracts have been created over the last few years, based on the number of companies offering them and their new listings, it’s safe to say there are at least 100,000 properties being offered this way. And while we’re beginning to see some regulations put into place for these transactions, until recently, it’s been between private parties and government has been staying out of it.
It’s becoming popular because of the built-in safeguards. The seller does not transfer title initially, so if the buyer doesn’t fulfill the contract, the seller is protected and retains the house. It’s like buying property complete with a renter.
Even better, the land contact can work as either a real estate investment or a financial investment. As the holder of a land contract, you can re-sell it just as a retail store might sell a financing deal to a third-party. If you buy a land contract worth $40,000, you can get it at a 25% discount, or $30,000; there’s a quick $10,000 profit. If you want to take a bigger risk, you can take a contract with a shorter payment period and some other issues (perhaps the renter has been late with payments a couple of times) and get it for a 50% discount. Again, the options are as varied as the properties themselves.
If you want to know more about how you can benefit from land contracts, contact me.