Pros And Cons Of Using Land Contracts For Real Estate

We have talked about the pros and cons of using land contracts. Of course the pro is that your tenant buyers pay the taxes and insurance. The con is that if we feel we have to take it back, it takes us a long time to get the tenant out of there. I’ve got this rule in my hometown of Springfield, Ohio where their down payment is treated like a deposit.

In our area on a real estate lease-to-own we post a 3-day notice of eviction. If it’s a land contract we have to post a 10-day notice. There are a lot of differences between the two. The people in your office have to be able to keep track of what’s what and who’s who so they can handle each situation the right way. This is hard. But, we have a dream team on it and it gets done the right way.

So on a lease option, one of my people can go post an eviction notice and we’re on the way to the next step. If they don’t pay then, on the following week we have the attorney go to the courthouse and file eviction proceedings.

With a land contract, in the case of somebody that doesn’t pay, I can’t touch them for a month. Then I have to do the 10-day notice. It really gets to be a long process and I end up feeling like I am being dragged through broken glass.

There is also a psychological factor here. If the tenant puts a large amount of money down, they will be more likely to feel better about themselves and their property. They will also do a better job taking care of things. They will essentially feel like they are owners. That makes them feel proud of their property.

But that is not always the case. I have had a number of great buyers who started as land contract clients. They came in with nothing because life brought them to their knees. These are good people who saw their careers fall apart, went through an ugly divorce or had some other hard circumstance. They just needed to get back on their feet.

They were still diligent and had great work ethic. They followed through with us and held up their end of the deal. They were able to cash out. So, in the end, it really boils down to the people you are doing business with.

You need to know the people and know their attitudes. You can get a good sense of where their head’s at when you talk to them. But you never really know until you’re in the deal with them.

With some exceptions, when we sign an agreement with them, we assume that they’re going to be buyers eventually. The exceptions here are clients in our properties that are designated as rentals only.

In the other cases, we figure their head’s on right. They’ve put the money down. They’ve gone through the wringer that Kevin puts them through to make sure that they step up and qualify. But often what happens is they get into the property and their renter’s mentality comes back. They lose their line of thinking where they want to buy a property.

Kevin monitors the pulse of these folks. He comes in to our Monday meeting and says, “These people are buying. They went in. It looks like it’s going to be good. They’re in gear.”

Then the next thing we know is we go to the house and they got ferrets and chickens running around and goats in the kitchen. The status report changes, I think the chickens alone would change that status report. We lose some soon to be buyers when they’re in the renting mentality.

When we were starting this business up, we figured that if somebody was going to sign and bring money to the table, they were going to buy. We have matured in this business over time. We have been hardened to some of the things that really happen. Not everybody is going to make it and some are going to take advantage of you. You get thicker skin as time goes on.

Often, we sit down with somebody and listen to their story when they’re trying to do a lease option. It is hard to be able to figure out whether this person is going to make it or not. We’ve been right the first time out and we’ve been dead wrong. When we were wrong, it was hard to understand.

Then there are the times when we were right and didn’t think we were going to be right. So, the moral of the story is, all you can do is do the best job you can with screening. Get the facts that you can, and if they have the money and the wherewithal, you give them a chance. Just work with them. There’s no crystal ball for this. If there was, I would have invested in it years ago.

You just have to accept the fact that you can’t be right 100 percent of the time.

Something drastic will change. They had a job and were on top of the world, and then the next day they don’t have a job.
You will hear a lot of stories. We have had people call in and we speak with them for a while. Then we find out that they didn’t even have a job.

They get into the position where they’re looking for somebody to give them a life preserver. Sometimes they’re very thankful of it and they’ll do everything they can to be able to live up to the bargain. Sometimes they won’t try to hold up their end.

E. Alan Cowgill is the owner of Colby Properties, LLC. and President of Integrity Home Buyers, Inc. Since 1995, Alan has bought and sold hundreds of single family and/or small multi-family investment properties in Springfield, Ohio. Alan uses Private Lenders, not banks, to fund his real estate purchases. By doing this, he has created his own private bank of $2,000,000 in funds. Alan looks for situations where the seller, the lender, and the eventual homeowner can all “Win”. He is not a Realtor, but a Private Investor, author, consultant and national speaker. He has been asked to speak on the topics of ‘Investing for the Beginning Investor.’ and ‘Finding Private Lenders.’ His home study system, ‘

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