Land Contract: Worst Case Scenario

I’ve been doing land contracts, which are a variation of “rent to buy,” for several years.  I’m a big fan of this type of exit strategy, for many reasons:

  • The buyer gives me a nice down payment, usually $2000 or more, which is non-refundable if he defaults.
  • I am not responsible for home maintenance or repairs.
  • Although I carry the home insurance and property taxes, I add these costs into the buyer’s monthly payment.
  • Since none of my buyers are able to qualify for a traditional mortgage, they are willing to pay the higher interest rate I charge (10%).
  • Even though I’m acting as the bank, I still have control over the property and can make sure my buyer is taking good care of it by doing occasional checks.

In all the years I’ve been doing these land contracts, I’ve had three buyers default.  I mentioned one of them in my post “Be The Bank.”  A second buyer, Kenny and his wife, had been renters of mine for a year.  They were clean people and had been steady payers.  I allowed them to purchase one of my single family homes on contract.  They were thrilled.  Unfortunately, Laura suffered a heart attack which required surgery, and their hospital bills were financially debilitating.  They were forced to default on their mortgage with me.  However, it was a painless process.  They admitted the difficulty immediately and relinquished the home to me.  The quit claim deed gave the house back to me, and I found a renter for the  home.

My most recent default was what I call the worst case scenario.  Jim and his wife bought my three-bedroom home and lived in it for two years before the wheels came off.  He had his own auto repair shop, and with the economy being down, his business was struggling as well.  He got behind and my kind nature got the best of me.  I decided to “work with him” while he looked for something else.  By the time he found work with an auto repair shop as a manager, he owed me almost $2000.  I trusted him to pay me regularly until he was caught up, and he didn’t honor his word, so I had to forclose on him.  This rarely happens.  The situation with Kenny and Laura is typical.  The vast majority of buyers do not want to be taken to court.  I guess Jim didn’t care.

Unfortunately, you can’t get rid of a land contract buyer by going through the small claims court.  It’s not that straight forward.  I had to involve my real estate attorney and he had to file the foreclosure in  superior court.  The process took about three months from start to finish.  And my buyer didn’t show up in court, so it was a simple five-minute signing of some papers, giving the house back to me.  I paid my attorney $650 for the favor.

Worst of all was the fact that my buyer left the house a total mess.  This surprised me.  He took everything he wanted, and left a bunch of junk and trash behind.  I was mad and disappointed, to say the least.  I treated him with kindness and respect.  But I have to say, I wouldn’t have been as mad if I hadn’t let him stay so long! 

So in closing, some advice. . .

I still like land contracts, and will continue to use them, for the reasons mentioned above.  But here’s the valuable lesson I’ve learned from Jim.  When someone stops paying, you need to get them out of your house, regardless of the situation!  Times are tough out there and bad things do happen to good people, but we are real estate investors, not social workers.  Don’t let your emotions cloud your thinking.