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Sellers Options Part 7: Land Contract – I’ll Pay Over Time
Joe: Hey, it’s Joe Crump and I’m doing a series on seller options. What are the seller options when they want to sell their property. What is every option that they’ve got? And this eight-part series tells you every option that they’ve got and helps you understand how it works and what the pros are and what the cons are. This option is option, is video No. 7, and option No. 6., is they could sell it on a land contract if you choose to buy it that way.
Joe: And I’m going to read you a little blurb on how that process works. A land contract is similar to subject to, but instead of us taking the property we usually sell it to a third party. They make payments to you and you continue to make your payments to the bank. If they default, you’d have the right to take the property back. The terms, price and payments are all dictated by you, the seller. The pros to this, this is a great way to sell a house that needs work. If you have a place that you can’t fix up, or get it habitable enough for a tenant, this is an excellent method for selling and a lot of times we’ll use this method if they have a property that’s not habitable. Instead of doing a lease option, we’ll do a land contract on it for that reason.
Joe: The down side is when you sell it this way your name stays on the mortgage and you have to continue to make your payments. If the buyer defaults you might have to go to court to get it back. This can take one to three months unless the buyer has more than 20% equity in the property. Usually and attorney can get this done for you inexpensively, but if this happens, you can sell it again to a new buyer, usually for more than you sold it previously and still you won’t have to do the repairs.
Joe: The analysis is, this is a good method for selling a house in poor condition because sometimes you can charge more than your monthly payment on your current mortgage and create some positive cash flow. It’s also a good way to sell a property if you own it free and clear and you’ve got a lot of equity. It’ll protect your equity and secure it with the title. It’ll also give you income on that equity.
Joe: We often sell our own properties this way and have had a lot of success with it. It turns you into a note holder and an investor rather than a landlord and it keeps you from having to come up with the mortgage payment each month. You also don’t have to manage the property or hire one if you do it this way. Selling on a land contract will make it possible for us to sell it quickly, with our own online marketing techniques, usually within 30 days. There aren’t many closing costs with this method, either, less than a thousand dollars most of the time. Sometimes zero.
Joe: We use this technique for a lot of different situations, so if you think it might be right for you, let us know and we’ll give you our opinion and our offer.
Joe: Now, that’s the typical line that we give. There’s another way that we’ve been buying properties on land contracts that I keep for my portfolio. And we’re doing this with low price properties, typically properties that are under $100K, and most of them under $80K. Sometimes, if you get a property for $30K or $40, and there’s a lot of areas where you can do this, a lot of urban areas that you can do this, and there’s a lot of rural areas that you can do this. There’s a lot of small towns all over the country that have properties that you can buy, you know, three bedroom, one bath houses that’ll rent for $750 a month that you can get for $35K or $40K in reasonably good condition, not in terrible condition, that won’t take much to clean them up.
Joe: So what we’ll do is, we’ll go in and we’ll buy those properties on a land contract, let’s say a $35K property on a land contract for $300 a month. And the way I come up with $300 is I’ll take the rent, so let’s say $750 is the rent, and $150 is the taxes and insurance, and let’s say another $100 for property management, so $250 for that. That leaves me $500. I also want to get $200 for cash flow just to make sure I have positive income on it. If I subtract that from the $500, that’ll bring me down to $300 a month that I can pay on this property. Then, I take that $300 and I divide it into the $35K and that’s typically about seven years of payments at $300.
Joe: Now, we don’t pay interest on these. These are principal only payments, which is wonderful, which means every $300 we send to them, it means that we just made $300. We just took it off the price of that property. And it also means that those properties are paid off for, typically we’re paying them off in four to ten years, depending on the price of the property and how much income they’ve got, plus we’re getting income on them during the time that we’re holding them, plus we’ll lease option those properties so we get a lease option fee and we typically, on a cheap property like that, we’ll get between $3,000 and $5,000 in cash and between $2,000 and $3,000 or $4,000 on a note. So that’ll bring our income up.
Joe: So, let’s say on a little $35K property we’re going to get $5,000 down payment, $3,000 in cash, $2,000 as a promissory not that they’re going to make payments on of $200 a month which will increase our cash flow by another $200 a month on that property, plus give is $3,000 in cash which we probably have spent on fixing that property up to clean it up to get it sold.
Joe: I typically spend more money on properties when I buy them because I want to get them into really nice condition, so maybe we’ll put $10K into the property. But I’ll get that $3,000 back and then we’ll pay off that property in a few years, that return on that investment is very high because we didn’t put any money down on this property, we didn’t qualify for a loan on this property. All we’re doing is we negotiated with the seller who has the equity. And typically they only do this if they own the property free and clear and there’s a lot of people that own properties that are cheap that they own them free and clear.
Joe: You can’t even get a mortgage under $40K these days, so anybody who’s got a $30K property probably doesn’t have a mortgage on that property. So those are good people to go after. And if you build a portfolio, if you buy, you know, 10, or 20 or 50 of these things that’s going to give you some pretty amazing income and it’s going to pay for itself and you’re going to have the entire income from it as soon as it’s paid off in that 5 to 10 year period.
Joe: Anyway, this is a great way to buy properties and this is a good explanation of what that seller options they have. So there’s two different issues here. One is buying those cheap properties and the other is buying a property, helping somebody flip a property where you don’t have to put money into it, but they can’t sell it because it’s not habitable, so you do it as a land contract and it doesn’t have to be habitable to sell it on a land contract. It does if you’re selling it on a lease option.
Joe: All right. Hope that helps.