Gimme shelter...Renting vs. Land Contract What’s The Real Deal?
Everyone knows what renting a home entails. You pay your rent and the only thing you get is a place to stay for 30 more days. That’s it. Nothing more.
Many renters would simply love to buy a home. When asked why they are still renting most people say “We can’t buy a house because our credit isn’t strong enough yet” That’s a common dilemma but did you know that if your landlord reported your lease and payments to the credit bureau your credit score would significantly increase (on-time payment history of course)? It’s just like a car lease.
The credit bureaus base the bulk of your score on your highest monthly reporting debt. So therefore your rent would most likely be the bulk of your score. If you’ve been renting for 3 years and have never been late you would have an incredible score by now (assuming you had no default debts). You could buy a house right away (with a payment based on your income).
The bad news is landlords are never going to report your rent... unless you default your lease. Then they will add up the remainder of the lease, damages (accurate or not), fees and who knows what else tally it all up to some ridiculous number and stick it on your report. Nobody even checks to verify the amounts are accurate! They basically just put whatever they want. I think that’s the biggest crock of crap any cow has ever spewed! You get hit with a devastating negative entry on your credit report if you don’t pay once but get no credit whatsoever for all the months you paid on time!
If it was up to me landlords would be required by law to either report the tenant’s payments every month or none at all. Period.
Obviously it’s not up to me but I still think it’s unfair, underhanded and unprofessional to conduct business like that. Especially when it concerns one of the most important things people need... their home.
Just ask the trying to be trendy little fake smiling b#t#h at the rental office in any “up scale” apartment complex if they intend to report your monthly $1000 payment. If she stops her pseudo smile in its tracks and mumbles something about “we don’t report to the credit companies” ask her to put it in writing that the company will never under any circumstances report your information to the credit bureaus. Bet you get a big fat “absolutely not” on that request!
Why, because the multimillion dollar complex has no interest in reporting your on-time payments so you can increase your score and leave them to go buy a home of your very own. They would have a hard time finding tenants that are stupid enough to pay a house payment every month on a cramped little shoe box crap ass apartment that’s why.
We know most landlords totally suck but what are you going to do about it? Well unless you get your credit on the fast track there is only one way to escape the wretched grasp of these vultures... Land Contract.
A land contract is a term most are unfamiliar with. Many have heard it but really have no idea of what it means. It breaks down like this, The owner of the home agrees to sell the home to you for a fixed price. The owner then provides a note (or loan) for the purchase price. In essence it’s “buy here pay here houses”
You pay your payments directly to the owner (who is now like the bank) and the owner applies the correct principal and interest to your account balance (or payoff) each month. Some of your monthly payment applies to the purchase price just like a bank loan. Eventually you will have it paid off.
The owner usually dictates the term (length), interest (expect higher rates than banks) down payment ( usually they are much more flexible than a bank on that) and conditions of the contract. Once a deal is made and contracts are signed you OWN the home!
The seller has no rights whatsoever to be on the property. The seller does however, have a mortgage filed on the property. A mortgage is a document filed in the courts office that secures the lenders right to collect the current pay off amount if the home is sold, paid off by insurance or refinanced. The mortgage also allows the seller to foreclose (repossess) the property if the conditions of the contract have not been met.
All in all it’s a win win situation for everybody. The seller gets a nice chunk of cash in the form of a down payment coupled with a 30 year income stream (with significant interest earning potential) and the buyer gets a home when the banks all said “no way”.
The owner can also report the monthly payments and it’s just as good for your credit as if they were reported by a bank. Make sure you add that into the contract if it’s concern for you.
It’s surprising more landlords of single family rental houses don’t land contract them instead. After all they get more money, have absolutely zero responsibility for repairs, maintenance, taxes and even insurance! How much does that add up to in a year or two’s time!
Besides that I challenge anyone to show me how to earn 10-20% on my money with a 10% or more initial bonus plus insure my investment with a policy I don’t even have to pay for! Yeah I don’t think any investment banker can match that deal. I’ve never heard of any investment that’s insured, let alone insured with a policy I don’t even pay for.
It’s no wonder the banks keep getting richer and richer because this is the basic same investment they make with their money. They know the loan they give their customers is backed up with a mortgage and insurance you pay for. Not to mention houses are one of the only things with a predictable value increase from year to year.
Besides all the benefits financially from land contracting instead of renting there are other import factors as well. I love the zero responsibility for one, bad water heater... their problem, deck falls down ... their problem,
new furnace needed in the middle of winter, you guessed it... their problem.
Also take into consideration the credit reporting aspect. If you land contract your rental and report the payment odds are the buyer’s credit is going to drastically improve. When that happens every greedy little loan officer out there will put them on the mailing list and stuff their mailbox full of “refinance now” flyers and other such propaganda. This is a good thing. Because if the lender actually can lower their payment with a refinance the buyers are going to take it. Which means you get paid off in full at the closing.
“But what about my 30 year income stream”
You can still keep your income stream and make more than you thought. Lets look at an example.
1. Your rental is appraised at $100,000
2. No appraisals are required in your land contract sale.
3. You land contract the house for $115,000
4. You require a $10,000 down payment.
5. The buyers now owe $105,000 on an 18% 30 year note and a $1582.45 monthly payment.
6. With your monthly credit reporting you have helped to boost their score enough in a year to enable them to refinance to a 8% loan with $660 payment.
7. In the 12 months you have land contracted the property you will have earned $18,892.22 in monthly interest plus the original $10,000 down payment totaling $28,892.22 and you still have $104,902.85 coming to you at the closing.
8. You will have taken in a total gross of $133,795.07 off a home appraised at $100,000 in just 12 months time...insured for free the whole time to boot. Try to do that with a rental!
Naturally you notice that the home’s payoff is $104,902.85 and if the appraisal was originally for $100,000 the buyers are going to need to pitch in an extra $4,902,85 on top of the down payment if the home still appraises out at 100K. However, in the twelve months the appraisal may be higher now to support the extra $4,902.85 and the new owners may have made improvements during that time that increases the value $4,902.85.
Either way it’s a no brainer and if the buyers do follow through the loan to term you’ll have earned $569,535,79 off a $100,000 home. If they sell or refinance you’ll get a significant return on your investment in a very short time, if not you make even more.
If you were to “flip” your investment property you would have to stick to the appraised value as well as take a big hit with agents commissions, taxes, title fees and so on. A $100,000 home with a 6% commission and fees could end up netting in the low 90’s or high 80’s after the real estate brokers, banks and title fees get their share. Not to mention few people are going to pay full appraisal price anyway.
If you have never dealt with first time buyers your in for a real treat. Your going to get lenders who lie and tie up the property just to shop for a loan that may never transpire. Your going to be asked to chip in on everything including down payments and points not to mention make changes and repairs to satisfy FHA and other lenders demands. It can get real ugly real fast. You had better pray the buyers have and agent experienced with first time buyers. That’s a fact.
If you rented the home continuously your going to need to update, repair, maintenance and advertise the property constantly as well as pay the taxes and insurance. These costs in the long run could become quite sizeable. Besides, rarely do renters take care of the home the way owners do either. Land contract buyers will most likely improve the property. After all they just bought their first house and are very excited about it.
Perhaps the best part of it all is you are providing security for you and your family by land contracting your investment property while also providing another family with their dream come true... home ownership.
I’m seeing more and more companies starting up land contract based businesses, a quick Google search for “Cincinnati homes to land contract” brought up 757,000 results. Obviously it’s catching on and now that you know more about it you probably see why. Hey “buy here pay here” worked wonders for the car business. It will do the same for homes as well.
After all is said and done the fact is the average person’s credit score is dropping lower and lower every year. 20 years ago the average age for bankruptcy was 46 now it’s 27... wow. The banks aren’t getting any easier to deal with and home loans are requiring more restrictions all the time. So the good news is if you do choose to land contract you’ll never run out of potential buyers that’s for certain.
Bottom line is home owners are great for the community, they cause less crime, contribute more tax money for schools and add value to the community. Just look at the area’s of Cincy that are predominately rental based and those that are mainly single family homes.
You’ll see the difference for yourself!
