My son reads your columns and thought I should ask your opinion about a potential sale. I am selling a home in Richmond that my husband owned free and clear prior to his death. The Realtor™ I hired is trying to get me to sell it on a land contract for $200,000 with $16,000 down, 6.5% interest, and payments of $1235 for 20 years. I am nervous about a land contract. What do you think I should do?
— M.M., Richmond
M.M., You would be crazy to do this deal. There is not one part of those terms that are actually in your benefit. I think the only people who really benefit are the buyer and your Realtor. You should be glad your son reads this article. It saved you from making a huge mistake. I wonder whose interests your Realtor is really serving-yours or hers? First of all, you would only be getting a few thousand dollars at closing. Of that $16,000 down you would pay your Realtor $12,000 for her commission(6% of the sales price). This leaves you less than $4,000 actually in your pocket. That offers very little protection against potential damages or lack of payments. Also, I have never heard of someone doing a land contract on a home for 20 years. Why would this purchaser need that long to get a mortgage to pay you off in full? I would never recommend a land contract any longer than 5 years. It is just too long for you to wait to get your money. In addition 6.5% interest is better than many banks are offering right now. Your agent wants you to sell your home for $4000 and collect below market interest for 20 years while she immediately pockets $12,000. Is she actually looking out for your best interests or just trying to get her money right now? I would tell your Realtor that if she doesn't start working for your best interests that you will find another agent. As a general rule---you should never do a land contract on a home unless you get at least 20% down. Even then it is still a risky proposition as the foreclosure process could exceed 12 months and that leaves plenty of time for someone to significantly damage your home. If you want to sell so badly why not continue to lower the price until someone agrees to buy it outright with cash or a mortgage. The market may be slow but as the price continues to lower eventually someone with cash or the ability to get a mortgage will buy your home. This way you get all your money up front and can invest it without having to worry about collecting payments from someone for 20 years.
Alex Lengemann is a licensed Real Estate Broker who operates RealtyVolution.com, a local real estate company. You can Ask Alex your real estate or mortgage questions by phone 810-664-1819 or by email Alex@RealtyVolution.com.