Advantage of Fixed Price

One important advantage of the installment contract approach to home purchase is that the buyer can often lock in a purchase price, even if the actual purchase transaction is still years away. The benefit of this is that such a fixed price can beat inflation by taking advantage of anticipated appreciation.

Consequently, even if the buyer and seller agree to a market price today, the buyer will be purchasing the property at a premium value (because of its equity appreciation) a few years later.

For example, consider the scenario of Lorna who wishes to buy a $90,000 property with an installment contract—and with no down payment. After three years, the property's value appreciates to (hypothetically) $100,000. During that same period, Lorna's monthly payments lower the principal balance to $80,000.

Thus, when Lorna applies for a refinance, she will be applying for a mortgage loan of $80,000 on a property worth $100,000—therefore, she has established $20,000 in equity without really trying.

$90,000

Sales price on installlment contract

$100,000

Appraised value at time of purchase completion

$80,000

Balance on installment contract sales price after three years

$20,000

Property's built-in equity at time of purchase completion

If she wanted to, Lorna could take out a second mortgage on her equity of $20,000. She could then use that second mortgage loan to consolidate other debts, arrange home improvements or make a down payment on another property. She could also decide to sell it.

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What You Need to Know About Real Estate

What You Need to Know About Real Estate

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