Monday, January 11, 1999
Land contract alternative to bank home loan
BY PERRY BROTHERS
The Cincinnati Enquirer
Feeling left out of the home buying boom? A long-standing alternative to traditional bank financing might open the door to home ownership, even with lackluster or crummy credit.
Matthew Hyden, 24, entered into a land contract at age 19. At the time, he had no credit, but the contract legally made him a homeowner. For the past five years, he's been paying the seller directly. Last week, Mr. Hyden and his wife, Jennifer, 25, finalized the sale via bank financing.
Land contracts aren't new. The financing method was popular in the late 1970s and early '80s when interest rates skyrocketed and the residential market slumped. As with most non-traditional financing routes, the interest rates can be higher and the contracts involve a bit of risk. And, too, a properly prepared contract is crucial to keep the buyer or the seller from getting burned.
But, if the bank says no, a land contract is a viable option with potential perks. The contracts for sale generally require lower or no down payments.
Mr. Hyden locked in the price of a Northern Kentucky home in 1992. The purchase price was $56,000. Today, thanks to a new subdivision nearby, the home's appraisal value has risen to $85,000.
“I'd definitely say we came out ahead,” Mr. Hyden said. “If we had been renting it still, we'd have to pay $85,000 for it. And we'd be going through the same mill trying to get a loan. I've never had a credit card over $500. I don't use them.”
While he was paying on the home, Mr. Hyden was in the Navy, living in military housing and basically out of the consumer credit loop.
Typically, a land contract works like this: a buyer and seller agree to enter the contract. They set a price and establish the terms. After the contract is signed, it should be recorded at the courthouse. At that point, the buyer has a legally binding interest in the property.
Buyers assume various levels of responsibility, de
pending on the terms of the contract. But as long as they honor the terms of the contract, the buyer owns the home.
After the contract is “seasoned” — the buyer has made on-time payments to the seller for a year or more — mortgage companies will refinance the home in the land contract buyer's name. The seller is paid in full, the contract is complete, and the buyer enters the traditional financing sector.
C. Andrew Bach, a Cincinnati loan officer with American Homeowners Financial Agency Inc., is handling the Hydens' land contract. Mr. Bach purchased a home on a land contract several years ago.
“It's a temporary Band-Aid to a financial scratch,” Mr. Bach said. “If they've no credit, bad credit, bankruptcies, divorce, sketchy job time, self-employed — all reasons to be turned down by a bank, and it's usually a combination — since they're making technically a mortgage credit to the seller, not only have they rebuilt their credit, lenders look at land contracts, especially if they're seasoned over 12 months, as a mortgage.”
Mr. Bach stressed the importance of a well-prepared contract.
“Anyone considering a land contract should definitely consult a competent real estate attorney. There are some serious loopholes,” he said.
The loopholes vary from surprise loan payment balloons at the end of the contract to unrealistic home repair responsibilities.
The benefits to the buyer are apparent, but what does the seller get out of a land contract? The process is popular when a home has little equity or needs work.
People who must leave town and wind up strapped with two mortgage payments and an empty home can cover one of those payments and land a buyer.
The seller acts as the bank, which often means collecting interest from the buyer. And, if the area's rents can support it, the buyer can charge more than the monthly mortgage payment and make a profit.
Vena Jones-Cox, president of the Ohio Real Estate Investors Association, has purchased five investment properties and sold the same number of single-family homes using land contracts.
With the caveat of consulting a lawyer, Ms. Jones-Cox is a land contract advocate.
“People right now aren't taking very good care of their credit rating,” she said. “Sometimes, they get to be where they are 25 and married, and they want to buy a house, and they find out they can't because of something they did ... years ago.”
Ms. Jones-Cox said the downside of a land contract is the interest rate, which typically runs anywhere from 2 to 6 percentage points above the bank rate.
“That is the trade-off that the buyer is making for the fact that he is a credit risk,” she said. “They want to own a home, and that's smart. They just need to go into it with their eyes open.”
land contract. He finalized the sale last week via bank financing.
HOW TO PROTECT YOURSELF
The key to a successful land contract is a properly prepared contract. Experts suggest consulting a real estate lawyer for more information.
The Cincinnati chapter of the Real Estate Investors Association (681-7342) — though geared more toward investors — can help point potential homeowners and sellers in the right direction for more information about land contracts.
High-techs bolster local funds
Land contract alternative to bank home loan
MONEY BRIEFING
ASK THE MONEY PANEL
INVESTMENT PRIMER
