In the unforgiving landscape that is the real estate market right now, land contracts are a bright shinning light.  Home buyers do not exactly have a choice when it comes to financing through traditional routes.  Appraisals are six feet under with underwriters doing their very best to get the value near a meal at McDonalds.  Translation, no one is lending in Urban areas. 

I’ve done the FHA dance and I have the scars to prove it.  From reverse mortgages, 203k’s, and traditional FHA products all with similar results.  Great initial success followed by abysmal failure.  Not to be too doom and gloom on you but the fault lies not with FHA or the underwriters, but with me, the investor.  I made the choice to give control of my success and profits to a third party.  Well no more.

I stumbled across land contracts by accident.  I started receiving leads from my investor wholesale site from home buyers asking me to finance my houses for them.  I ignored the leads at first.  I had real problems to solve and it didn’t seem like a great solution.  However, more leads continued to trickle in and I wasn’t even advertising.  Luckily for me a friend stepped in with his story of success with land contracts.   

I started calling these people and I realized very quickly that they would agree to just about anything to buy a house at half the price it was selling for three years ago.  I was in the driver’s seat.  Using metrics provided to me by my good friend David Butler, I became the underwriter.  I ignored what most underwriters focused on the most, value and credit and chose instead to focus on afford-ability, down payment, and commitment to home ownership. 

The results were and continue to be impressive.  I regularly get $3,000-$4,000 down, whatever I want for purchase price, and a decent size payment.  And I have buyers competing to buy my house.  Nice change of pace.  Now for the nitty gritty. 

Mistakes I’ve made and some tips for qualifying tenants 

Never ever, ever trust what the buyer tells you.  Call and verify everything.  If you can’t verify, move on.  Don’t get attached to the family which is easy to do and I admit, I fell prey to this one time. 

If they are a handful before they even buy the house, walk away.  Repeated phone calls and emails and even showing up unannounced at your office before the time you agreed to contact them is a major red flag.  I will walk away from this now. 

Take the time to educate them on what it means to be a homeowner.  Property taxes, maintenance, making payments, living in the house for years.  I will literally scare the pants off them now where I used to be all sugar.  Being a homeowner is not all fun and games and they should know it upfront.  This scares away most of the problem children. 

Set appointments that are difficult for them to keep.  This shows how committed they are to buying the home.  Also, if they are late for an appointment and don’t call you ahead of time, this is also a red flag. 

Don’t close the deal to fast.  Close it too fast and they feel like they haven’t had enough time to think about it.  I like two to three weeks. 

Don’t take too long to close the deal.  Anything longer than four weeks and they might find something else or change their mind. 

Afford-ability is more important than anything else.  I add up all of their bills and subtract it from their net income.  If they don’t have $500 left over after paying everyone (in my market, average income $35,000 a year), including me, I know I am one unexpected problem away from missed or late payments.  Life happens, so plan for it. 

Sometimes they will test you by making late payments or slow payments.  Start the eviction/foreclosures process immediately.  When they get that letter from your lawyer, they almost always pay and all future payments are on time and or early. 

Give yourself an out.  I put three year balloon payments in.  What if property values rise?  What is I want to sell and move to Costa Rica?  What if I want to make the house a rental?  What if I just hate these buyers and I want them out?  I built in an escape hatch just in case. 

Last but not least, don’t be cheap.  Hire an attorney to do the paperwork and make sure he or she is good at what they do.  Make sure you research your states requirements and follow them EXACTLY.  If the crap hits the fan and you have to take one of these back, you don’t want to end up in front of a judge who finds you haven’t followed RESPA guidelines and fines you or maybe gives them your house.  Robo signers anyone? 

Hope this helps.  It takes a little bit more work but it is not just a viable way to solve problem properties but also an effective way to fill more properties as you grow your portfolios.  Let me know if you have any questions. The Detroit Market Expert http://www.UrbanDetroitOnline.com