Speaker 1: So if an investor approaches you as the seller, and they’ve proposed a land contract, there are some benefits and risks to selling to an investor, whether it’s us, another investor, it doesn’t really matter where you are, but land contracts, or seller financing it’s often called out of the state of Michigan, has some benefits and risks.
So we’ll start with the benefits. When you sell to an investor on land contract, you’re going to get more money most of the time for your property. And that can be something that, it might be more important to get a higher price than your money right now. In that case, a land contract could be a good option. The second benefit is that when you sell on land contract, you can either collect interest on the property, so say 2%, 3%, 4%, 5%, 6%, 7%, you can actually go all the way to 11% with your interest.
But as you know, when we raise the interest rate on the property, most investors will lower the price they’re willing to pay on the home. And that’s something to, you kind of see it like a lever, right? Raise the interest rate, then we’re going to lower the price. If we raise the price, we can lower the interest rate. So it gives you some more flexible options that can give you sort of future income beyond the time of sale.
So the risk of selling the land contract is that your investor won’t complete the land contract, that you’ll have to go through the foreclosure process to get the home back, and that can be a real pain. So just make sure you do your due diligence. Ask for bank statements, maybe a list of the other rentals they have, you could drive by them to make sure they’re in good condition. That might be a very good first step to verify that the investor truly has the capability of payback.
Finally, simplicity is really good when it comes to a land contract. You don’t want to collect a check every month, so make sure that your investor has a direct deposit set up, so that you can see your funds every month and you don’t have to worry about them. You can also work with an escrow company or a direct payment company that just collects the funds on your behalf and then sends them to you. That way they can send late notices and such if that happens, but the very best investors won’t be late, and you can simply use an ACH deposit, I think it costs $5 a month with LMCU, maybe $4.95, and that funds can just show up every month and you don’t have to think about it at all. So easy for you, it’s easy for the investor, and make sure you get paid on time every month.
If you’re considering a cash offer or land contract, certain scenarios may push you towards a land contract. And I’ll give you a client, I’m actually looking at buying a small apartment complex in the area, and the seller has 12 rentals. And she’s nearing, she actually is retired, and we’re talking about putting the property in her estate, and then I’ll buy the property and land contract from the estate.
And that offers some benefits. So she’s worried that she’ll get the funds and her money will be squandered if she passed away, because her get her kids get the money right away, right? If you hand somebody a half million dollars, are they going to be responsible with the funds? I don’t know. Maybe you won’t be. Maybe your kids won’t be. But if it’s an estate, that’s a wonderful benefit that that fund will pay through time. Another benefit is some tax consequences. You’re able to alleviate some capital gains, depending on the structure of the land contract or seller financing, and that can be a huge benefit, in the range of 5%, 10%, 20% of the purchase price you can avoid paying capital gains on.
So if you own the property right now and you’re using it as a rental, maybe dealing with tenants is too much work. You like the cashflow and you like having the property, but you don’t want to ever get another call at midnight about a leaking toilet, another tenant isn’t paying the rent. So working with a land contract is easy, because you could structure a deal that you can continue getting payment for the next 5, 10, 15, 20, or 30 years, and not have to deal with the headache of being a landlord.