Pros & Cons of Selling a Home on a Land Contract
A land contract can be a good way to sell real estate.
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Land contracts, also referred to as contracts for deeds, are a form of seller financing. When you sell your home on a land contract, the buyer executes an agreement with you to make monthly payments toward eventually earning ownership of the property. While land contract installment sales can be an excellent way to turn a piece of real estate into a tax-advantaged income stream, they also have certain drawbacks.
Faster and Easier Closing
When you use a land contract to sell your property, you do not have to go through a bank's underwriting and closing process. This means that the buyer avoids applying and qualifying for a loan, your property avoids being appraised, and you can skip the use of certain closing services. A land contract not only speeds up the transaction, but also saves both parties money.
Ongoing Cash Flow
A land contract turns your property into a cash-flow stream. Until the buyer pays off the contract, you'll collect monthly payments of principal and interest. In the case of an interest-only contract, you'll receive monthly interest payments only with a large principal balloon payment in the future. This arrangement can be an excellent way to turn an expensive piece of property into a tool to support your lifestyle.
Capital Gains Tax Deferral
Land contracts save you from getting a large lump sum of cash at closing. Typically, any gains in your sale proceeds are going to be subject to capital gains taxes. With a land contract, you take a little bit of gain every month and, as such, spread your gain out over time. While this is usually a benefit, if the capital gains tax rate goes up, you could end up paying more taxes by extending the life of the payments out.
Limited Ability to Reinvest Proceeds
Often, the key drawback to a land contract is that the agreement ends at a certain point. When you sell your house for cash, you can reinvest the proceeds into other investment vehicles which could, theoretically, earn you money indefinitely. When the buyer pays off the land contract, though, your payment stream stops, you cease earning income, and you do not have that capital anymore.
Long-Term Exposure to the Buyer and the Property
The other drawback to a land contract is that it leaves you tied to the property. If the buyer stops making her payments, you end up being in charge of it again. You also could lose the property if the buyer fails to insure it properly or pay her property taxes. With this in mind, you need to have a strongly-written contract to protect your interests.
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About the Author
Solomon Poretsky has been writing since 1996 and has been published in a number of trade publications including the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." He holds a Bachelor of Arts, cum laude, from Columbia University and has extensive experience in the fields of financial services, real estate and technology.
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