This is part two in the series of buying with owner financing. You can read part 1 here.
In this section we are going to discuss buying with a Land Contract (aka Contract for Deed, agreement for deed, or installment sale).
Buying with a Land Contract is still simple. There are two documents that you need to control the transaction. First is the Purchase agreement and second is the Land Contract. Buying on a Land Contract is still a very simple transaction.
The structure of the Land Contract is very easy to understand. You have a contract with the seller that spells out certain terms. Buying on a Land Contract you own the property. You don't have all of the ownership rights, just the ones that matter (right to occupy, depreciate the property, sell it, improve the property. It allows you all of the ownership rights that we expect when we get traditional financing. There are some rights that are retained by the seller but they don't effect the profit or the rights to occupy the property).
When meeting with the seller you are going to sign a purchase agreement that outlines that you are going to purchase the property on a Land Contract. Then you do your due diligence and if the deal is a go, you have a closing and sign the Land Contract.
OK, now we know the structure of the Land Contract how do we profit from the buying a property on a Land Contract?
Here are some numbers:
- Purchase Price to Seller: $180,000
- Payment to Seller: $1000.00
- Down Payment to Seller: $0.00
- Term: 5 years
- Rent to Own Sale Price: $215,000
- Payment to Investor: $1200.00
- Down Payment to Investor: $5000.00
- Term: 2 years
Bonus profit centers.
- Annual Depreciation Amount: $6,666.67 (you can write this amount off of your taxes. So depending on what tax bracket you are in you may get to realize 30-50% of this amount as a tax refund)
- Interest Write off: $12000.00 (for this example we will assume that the monthly payment is interest only. You will get 30-50% of this amount as a tax refund as well)
Purchasing the property on a Land Contract and selling it on a Rent to Own basis you will receive $200 a month cash flow, $5000 up front money and $30,000 as back end profit (the $5,000 gets deducted from the total equity). Then you can have up to another $9333.34 in tax savings. The profit equals $44,133.34 for using your specialized knowledge to put this deal together.
So by owning the property you can get up to another $9333.34 per year in profit as compared to controlling the property on a lease option like I talked about in part 1.
Documents needed.
- Purchase Agreement
- Memorandum of Agreement (if you feel that the seller is going to try to sell the property to someone else before you close the Land Contract. You would want to recored the memorandum of agreement and you get this document signed and notarized when you sign the purchase agreement).
- Land Contract (You will need to record the Land Contract to protect your interest in the property).
- A Warranty Deed (Placed in Escrow in case the seller falls off the face of the earth)
Like I mentioned in part 1, if the seller is in financial distress I would recommend only buying the property subject to the existing financing because there are a few areas where you could be vulnerable. A lien could be placed on the property if the seller was ever sued even though you have ownership of the property. Also I would recommend paying the underlying financing directly so the seller isn't tempted to just keep the money and let the deal go into foreclosure. Foreclosure can make a tough situation for you when you have a tenant in the property and the property is foreclosed on. It is going to be difficult to honor the rent to own agreement with the tenant.
There are tremendous profit centers in buying on a Land Contract and the down sides are minimal. Land Contracts are not common in every state. Ask your local attorney if they apply in your state. If Land Contracts are not popular in your area you are going to want to check out part 3 next week.
