In today’s economic climate, homeowners are being pushed into rentals. They bought homes they thought they could afford, and then realized they were in over their heads. Balloon payments became due, and they couldn’t come up with the money. Foreclosures are on the rise, and this trend promises to continue through 2010.
There are thousands of Americans who’ve been through the heartbreak of foreclosure. They are now in rental properties, and their credit is ruined. But, think about this for a minute. Many of them still hold the same jobs they’ve had for years, and still have decent income. They just can’t get a mortgage on another house. That’s where you and I come in.
I currently have four single family homes and one duplex I’m selling on contract to the tenants who live there. None of them would qualify for a traditional mortgage, but all of them have the ability to pay what they’re paying me every month.
I’m acting as the mortgage company, and I’m charging them 10% interest on their loans. You may think this is a little steep, but 1) it’s a risk for me, and 2) they’re willing to pay the higher interest for the privilege of buying the home. Before I make the deal with them, I find out what they’re comfortable paying per month. Although I continue to carry the taxes and insurance, I pass these costs to the buyer and include them in the monthly payment. A financial calculator can determine monthly payments and length of loan for you. I found a great website http://yona.com/loan/ to help figure out mortgage amounts. If you know the loan amount, length of the loan in months and the interest rate, this site will pop up the entire payment schedule, and you can print it out and give a copy to your buyer. My land contract is written in simple language, and the buyers are required to maintain the property, etc., etc. I’ve included a copy of my land contract in a book I’ve written, which will be available soon. I’ll keep you posted…
I allow my buyers to refinance in three years if they can. Most of the time, this doesn’t happen, becuase they either have bad credit or no credit. But if they can refinance, that’s great. They can lower their payments, you can cash out and buy another property or reinvest somewhere else.
I never take less than $2000 as a down payment on land contract sales. If you charge them $1000 or less, they’re less invested, financially and emotionally, and will be more likely to default.
To protect myself in the event of a default, I have my buyers sign a quit claim deed at our closing, giving the property back to me in the event of a default. This has happened only once, but I was glad I had that deed, because my buyer got into an argument with his boss, quit his job, and left for Missouri! I filed the quit claim deed, which gave the house back to me immediately. Usually, if people fall behind in their payments, they see the writing on the wall, and they just leave. You keep the down payment, and find another buyer.
One of my contract buyers, the Castillo family, has been on contract with me for six years now. They’ve improved the home and are thrilled to be homeowners. In August of ’10, they’ll own the house free and clear. Here is a photograph of their home.
They enclosed the front porch to create more living space.
Although doing land contracts is a great money maker for me, providing these dream homes for my buyers makes me feel partof something wonderful…for these families, the neighborhood, and the city as well. I love it.