Land Contracts- Southeast Michigan Real Estate
Over the past couple years I’ve been getting quite a few calls asking about Land Contracts and Lease/Option properties. Many of these callers have recently lost their homes to foreclosure or recently sold via short sale and need a place to live. It is understandable- these people are used to being homeowners and the thought of renting is not an attractive thought.
The other day I wrote a post about Lease/Option purchases and why it won’t work for many of the callers who have been contacting me. This post is an attempt to explain exactly what a land contract is and why that option will not work for most people either.
What is a Land Contract? Basically it’s seller financing. The seller is your bank.
Does this mean I can get in with zero money? You can– but it’s not likely. If you are too high risk for a bank to loan you money, you are high risk for a land contract seller, too. Usually a seller will require at least enough down payment to cover the commission. If the seller is represented by a good agent, the seller will want to see a credit report, proof if income, a reason for your poor credit (otherwise you would probably be getting a mortgage), and then after review the seller may approve you. If the seller does agree to take the risk, he will then determine the amount of down payment required and the interest rate which is usually a bit higher than you would get from a bank. The worse your credit the higher your down payment and/or interest rate will be.
Other things to consider:
If there is a mortgage on the property there is probably a due on sale clause that requires the owner to pay off the mortgage prior to selling.
Typically a land contract is for less than 30 years and there will be a balloon payment at the end of the term. Are you going to be able to get a mortgage for the balance at the end of the Land Contract term?
When you look only for homes offering Land Contract terms you are severly limiting your choices. Is it so bad to rent for a few years, repair your credit, save some money and buy at that time? Your choices will be much broader.