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Ask Dave

Land Contract Warning

Scott wants to buy real estate, and in his market, it's cheap. He'd like to buy and sell it on land contracts. Why does Dave warn Scott against this plan?

QUESTION: Scott in Michigan wants to buy real estate, and in his market, it’s cheap. He’d like to buy and sell it on land contracts. Why does Dave warn Scott against this plan?

ANSWER: That’s the problem with buying something on a land contract. I would never buy something on land contract because the property’s not titled in your name, and if something happens to the other party—the current owner of the property, which is whose name it’s in, they’re the owner, you’re the glorified renter when you have a land contract—even if they didn’t mean for it to happen to them, if it damages them and some kind of a lawsuit or lien gets on them, then you’ve got a lien on the property and you can’t get title to the property that you thought you owned. It’s that simple.

Let me give you an example. It wasn’t even six months ago that I ran into this. This great guy—he was a solid, standup dude—he had a small business, and he sold a property on land contract that was paid for. He didn’t have a lien on it. He sold it to another guy on land contract, so it’s in this guy’s name. His receptionist was doing his bookkeeping. She embezzled $30,000 from him. He got behind with the IRS, and the IRS slapped a $50,000 lien on him. The person he sold the property to will never get that property until that IRS lien is cleared up. It was no fault of the poor guy that bought the thing. He’s just stuck.

I wouldn’t do it, Scott. You’re going to get yourself burned.

If you’re doing owner financing, I would do the exact same mathematical calculation you’re doing, but I would just set it up as a lease with an option to purchase. The buyer has a lease with you, and they have the option to purchase and the option is a sliding option. The option price goes down every month as principal is reduced as if it was owner financed. And here’s the kicker: With a land contract in most states, you have to foreclose to get people out.

With a lease, you just do an eviction and the option—in the event the lease is in default—is void. It’s invalid. If they don’t pay their lease payment, they lose their option and you evict them like a tenant. It’s 1,000 times easier to get them out if they don’t pay, but you can do the exact same mathematical calculation that you were doing before. When they pay it all the way down, the option price could be $1 at the end, and they have the right to buy the property for $1 as long as they’re still current. In other words, they paid the property off, and they exercised their option. That simple. That’s the best way to do it from your perspective.