A couple of weeks ago I met a wonderful person how has been trying to sell her home for the last two years. We were scheduled to meet this week to list the home. She called me to let me know that she may be selling the home on land contract to a friend.
I think it is great that her home is going to be sold, though I did offer some suggestions. I thought I would share those suggestions here:
1. As a seller, make sure you have a clear understanding "Why?" the buyer needs to purchase your home using a land contact. There are a number of variables that would cause one to need to want to use a land contract. Most common would be that they don’t financially qualify for a tradition mortgage product – mostly due to credit issues. In my opinion, I would not allow someone’s bad credit history this to be the only reason not to sell on a land contract – though you need to try to get to the bottom of the whole story. Is the buyer’s situation chronic or a result of a one time event, i.e., divorce, job loss or down sizing, medical issue, etc.
2. How much of a down payment should be paid? On a typical land contract you would want to collect enough to cover your costs (title insurance, closing fee, real estate commission, etc). This might mean that a 10% down payment may be necessary. This means that on a $120,000 house the buyer would need to come up with $12,000. In some cases that may be a challenge for a buyer to come up with.
3. How much would the payment be? There are a couple of ways this could go. In our area the payment on a land contract is typically 1% of the original land contract balance. So, using our example above the original balance would be $108,000 and 1% of that is $1,080/month. You could also use a loan calculator that will allow you to put in all the particulars and give you the amortized payment. Some land contracts also have a balloon payment after a period of time (three, five or ten years). This is when a buyer has to pay the remaining balance after agreed upon time period.
4. How much interest should I charge? Each state has maximum limits on how much interest a seller can charge on land contract – in Michigan it is 11%. This amount is negotiated between the buyer and seller and is dependent on the current market.
These are just some of the questions I get about selling homes on land contract. Feel free to contact me with a specific question you have about your property.
Jay Spencer
Lease Option & Seller Financing Specialist
U.S. Home and Realty
616-301-7000 x201
Comments(2)