You have a house. You want to sell it on contract to a good buyer- fast and full priced. How do you make a good deal and protect yourself.
Let's Make a Deal!
How do you structure your deal to make the most of your willingness to sell on contract? Let's cover the selling price first:
- Since you are willing to carry the contract, you should ask for full price. What's full price? First, find 2-3 Pay an appraiser. It will cost you $200-400 and make sure that it's an appraiser that is recommended to you. There are too many appraisers who are afraid to give an accurate appraisal.
- You don't not need to pay any closing costs. Don't let anyone tell you that you need to pay 3%- that's only for a government loan. You are not the government. You are not constrained by government rules on seller assistance. Get the full price.
The interest rate will have a significant impact on the month payment from your buyer. Too high and you put them at risk of defaulting on the loan. Too low and you are missing out on a significant amount of profit. Of course the payment will need to cover taxes, insurance and any underlying mortgage.
Next- you need an amortization term. Possibilities? Interest-only, 30-year, 25-year, 20-year, 15-year. (Actually, any number of years would be fine.) Again, this will impact the monthly payment. The longer the term, the lower the payment. It will also impact your taxable income. Shorter terms have more principal paid each month. The principal paid back to you is not taxable.
The term of the loan depends on how long you want the capital to be out. Some people will need 1-2 year balloon payments because they need the cash back fast. Others want a long-term cash income stream that would last for their lifetime. The buyer may have refinancing constraints, such as a bankruptcy or short sale. Common balloon periods are 3-10 years, unless the seller is looking for long-term income.
First, get to know your buyer. Sit with them. Understand their story. Then, verify it. Get a background check. Not just a credit score- their credit may be really bad but they could be a great buyer! (See my last blog to read why.) See if they have a criminal background or any other issues other than their credit scores.
Next, make sure that they have a down payment. At least 5%, but 10-20% is even better. You are selling them an expensive asset so they should have "skin in the game." Contract home buyers qualify for the $8,000 first-time home buyer tax credit offered by the federal government. They should also qualify for any state or local tax incentives.
Use an experienced title company to close the transaction. They will protect you through ensuring the transaction is recorded correctly. You will also need a seller's title insurance policy. Your buyer's title insurance is only good until you sell the house.
Set up the monthly payments to go through an escrow company and ensure that taxes and insurance are collected each month. They will also pay any underlying mortgages to protect the buyer.
Need More Information?
This is just a minimal outline of how to do a contract sale. There are tax and legal ramifications of selling a house on contract. You should contract professionals. Expect to pay fees- title company, legal, or even a real estate agent's commission, to close this transaction. Another source of advice would be professional real estate investors.
Don't know any real estate investors? Go to a local real estate investor's club meeting. There are people at the meetings who can help you.
Contract sales are a GREAT way for both parties to get what they want. The more open and honest people are, the more likely a good deal can be struck.
Tell me about your last contract sell, or e-mail with any quesitons!