For many years, I’ve used land contracts as one of my exit strategies. For those of you who aren’t familiar, here’s a biref scenario: Let’s say I have a trusted tenant who is tired of renting and would like to buy the house he’s currently renting from me. Robert’s done a great job of paying on time, and he keeps the house clean, inside and out. The problem is, he has bad credit. He made some poor choices in the past, and there’s no way he could get a mortgage in today’s economy, even though he as a couple thousand dollars he could put forth for a down payment.
This is where I come in. I can be “the bank” for someone like Robert. With a website like www.bankrate.com and a financial calculator, I take his $2000 down, and structure the deal. I set the sales price, determine how much per month he’s comfortable paying, and go from there. I discuss this stategy at length in my book, The Landlord Chronicles, which will be available through www.authorhouse.com by late July, or directly from me at firstname.lastname@example.org. The land contract is an excellent way to provide your tenants with the joy of home ownership, and also make a great deal of money in principal and interest payments over the term of the loan.
Unfortunately, with the abuse in the real estate market that occurred throughout the early 2000’s, which allowed unqualified people to obtain loans, the government has cracked down on mortgage loan originators. As part of the federal Housing and Economic Recovery Act of 2008, each state is being required to pass its own set of rules that will oversee mortgage brokers, to ensure against fraud in the future. In light of what happened to thousands of uninformed individuals who bought homes they had no business buying, then lost them within a few years, I quess this is a smart move on the part of the government.
However, this extension of HERA, called the SAFE Act (Secure and Fair Enforcement Act) requires all people who handle home loans of any kind to be licensed. This includes you and me. At first I thought, “No big deal, I’ll just get licensed.” Not that easy . . . it’s expensive, and you have to jump through lots of hoops along the way. So, my land contract days are done, for now.
But, the party isn’t necessarily over. We investors can still use the lease option as an exit strategy. It’s similar to the land contract, in that you plan on selling the home to the renter. But it hinges on the renter being able to qualify for a loan at some point in the future. You and he can set that date between the two of you. He pays extra (usually $100 or more) per month on his rent, and this applies to the down payment. If he defaults, you can evict him easily, through the small claims court, just like a normal renter. I discuss this option in my book as well.
If you use the lease option, you may want to research a good credit restoration company to help your tenants repair their credit. So, is the party over? Not necessarily, but the keg with the imported beer just ran dry . . . 🙂