Why Sellers Are Willing
When I turned age 21, I wanted to build wealth and financial freedom as quickly as possible. At the time I was an undergraduate college student. I had little cash, no full-time job, and no credit record. I knew that back then (unlike today) no bank would approve me for a mortgage. But this small fact didn't crash my goals. No self-defeating self-talk for me. So, I searched for properties that I could purchase from sellers on an installment contract. By the time I completed my PhD, I had bought more than 30 houses and small apartment units. The cash flow from those properties paid many of my college living expenses.
Why are property owners willing to sell on an installment contract? Shouldn't they just deal with buyers who have the cash and credit necessary to get a loan from the bank? In my experience, I found sellers willing to sell on a contract for some combination of seven different reasons:
- No bank financing available. A property may not qualify for bank financing. The property might stand in poor condition, be located in a declining neighborhood, or stand functionally out-of-date (rooming house, apartment units with shared bathrooms, irregular floor plan, and so on). Also, many lending institutions won't write mortgages on condominiums where more than 30 or 40 percent of the units in the complex are occupied by renters instead of owners.
- Quick sale. One of the best ways for an owner to sell a property quickly is to offer easy terms of financing. The contract-for-deed is the easiest and quickest type of home finance plan available.
- Higher price. Property owners who offer easy financing can often sell at a higher price than they otherwise could expect to receive. Many buyers will trade off price for terms. However, if you choose this tradeoff, include a balance discount for early payoff. Or alternatively, include a clause in the contract that permits you to assign the financing to your future buyer. Otherwise, you've paid a price premium for favorable financing that you did not completely use.
- High interest on savings. Sellers who plan to deposit the cash they receive from a sale in certificates of deposit or money market accounts can get a higher return on their money by financing a buyer's purchase of their property. A 7- to 10-percent return from a real estate installment sale certainly beats a4or5 percent return from a certificate of deposit.
- Low closing costs. With a contract-for-deed, sellers and buyers pay far less in closing costs. You avoid nearly all the expenses that a mortgage lender would charge.
- Tax savings. When the seller is an investor, an installment sale of a property produces a smaller income tax bite than does a cash sale.
- Repossession. Should the buyers default, the installment contract may provide the sellers a relatively quick and inexpensive right to repossess the property. Some states have enacted laws that make repossession more difficult than it used to be. That's one reason why many investors now prefer to "sell" their OWC properties via a lease option agreements. In my view, lease options shift risk from the sellers to the buyers. As a buyer, I would prefer a contract-for-deed.
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