Eight Basics of Real Estate Contract (a.k.a Land Contracts Or Contract For Deed) - Part 1

Eight Basics of Real Estate Contract (a.k.a Land Contracts Or Contract For Deed) - Part 1

Real Estate Contract can be a good tool for real estate investors to receive higher income (usually higher than rental income by around 30% to 70%) for a few years during the term of the contract.

One of the main disadvantages of Real Estate Contract compare with the "Long Term Lease To Own" is that the sale price is set, most of the time, at current market value without giving much time for the real estate investors to ride out of this real estate recession. However, depending on the interest the buyer is willing to pay (the *spread* in the case of wrap around mortgage) and reduced or eliminated payment of property tax and insurance, the investors can expect sizable cash flow each month, which should compensate the loss of potential capital appreciation. One caveat to this strategy is buyer's ability to *pre-pay* the mortgage. See below for more discussion.

Real Estate Contract are common in some states, they are called Land Contracts, or Contract for Deed, but they all represent the same thing: a way of selling property where the buyer "borrows" from the seller for the financing rather than borrowing from a bank.

Within an agreed number of years, it is expected the buyer will be able to qualify for a loan. At that time, they will obtain a new mortgage and pay off whatever amount the land contract requires. Real Estate contracts vary widely from transaction to transaction, however the basics of the contracts usually are:

1. Seller retains legal title and the Buyer receives equitable title

The buyer will not receive the Deed to the property until the full amount the seller financed is paid in full. The seller remains the title holder while the buyer is making payments. The transfer of legal title is always done by a separate deed of conveyance, usually a warranty deed, which is placed in escrow when the contract is signed.

The contract does transfer an interest to the buyer, known as the "equitable title". The buyer signs a special warranty deed which is placed in escrow together with the seller's warranty deed. The seller can recover equitable title from the buyer in the event of buyer defaults by giving appropriate notices (typically 30 days) and terminate the contract. It's a much faster process compare to foreclosure proceeding.

2. Purchase Price often set at current market value

The Purchase price is negotiated between the Seller and the Purchaser. Properties sold on a land contract do not necessary sell for more, because buyer bears great risks to receive all-important owner financing. On the other hand, Owner can usually fairly quickly recover title/deed back from the buyer in the case of Buyer defaults and retains all down payment and paid interests.

3. Down payment

The down payment should be at least 7% to cover closing costs (6% agent commissions and title/escrow fees). The bigger the down payment, the more committed the buyer is and the less likely the buyer will default.

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