Are Land Contracts a Good Idea?
Posted by Jonathan Lum on January 3, 2017
Land Contracts do exist.
Are they ever a good idea?
Selection is Slim: Right now, there are 1,475 Single Family Residential homes on the market in the Greater Lansing Area. Of those, there are 27 offering Land Contract terms. Any home with a mortgage is usually unable to offer Land Contract terms because most have a "Due on Sale" clause; so even if you have a seller willing to entertain Land Contract terms, they may not be able to if they have an existing mortgage on the property. Also, it is common for homes offering Land Contract terms to be priced out of market.
Overall Cost. They will often require 10-20% down and may have interest rates as high as 11% and usually balloon in 2-3 years. That is usually a long enough period to repair credit. But not always. Remember, unlike renting, you will be responsible for maintenance on the house. If a major repair suddenly comes due, it can put a big dent into savings. Credit repair requires diligence and discipline; and often requires you to expend reserves. Leading to a...
Very High Default Rate. You'll be putting down a sizable down payment and repairing your credit so that you'll be able to refinance. But that too will cost money in closing costs and possibly down payment again subject to appraisal. A sizable repair or life event can set back plans on a 2-3 year time frame. I have done 6 land contracts out of the hundreds of transactions that I've participated in; of those, 5 have gone as planned. For the one that didn't go well, they would have been better off renting for many, many years.
For certain situations Land Contracts may fit well. If you have ample reserves and just aren't able to obtain financing due to some outlying short-term factors, then it may be worth considering. Be cautious and speak with your Realtor if you think it may work well for you.