Use Land Contract’s To Close Real Estate Transactions
Why use bank mortgages when you as the seller can be the banker. Seller financing is coming back into vogue again.
During the past months Ken Carlson Realty has closed a number of transactions using land contracts. There is becoming a voracious demand for creative financing for sellers and buyers. Many property owners have no mortgage debt on the properties they own. With all that equity and buyer’s unable to get banks to lend as they used to, land contracts are a great financing vehicle used to close the deal.
Buyer’s may benefit also. Most seller’s don’t report Land Contracts to the credit bureaus so the buyer’s credit report may not be effected by the sale. This strategy may give the buyer more credit to access for other purchases.
Here is an illustration of a $100,000 CASH transaction:
Seller closes a $100,000 sale. Seller pays $6,000 in commission, $635 title policy, and $860 transfer taxes which amounts to $7,495 in expenses due at closing. Seller pays capital gains on the $100,000 at their tax rate. Lets say the seller is in the 15% tax bracket. Seller pays another $15,000 in federal tax. Seller has decided they need the money to provide supplemental income in retirement. Seller now has net proceeds from sale after expenses and capital gains of approximately $77,505. With the proceeds from the sale the seller deposits the $77,505 into an investment account. Lets say the rate is approximately 3%. You may be able to get more, but your risk factor increases greatly. With $77,505 in hand and your investment paying you 3% you will get a small $193.75 per monthly or $2,325 per year!
Here is an illustration of a $100,000 LAND CONTRACT sale:
Seller closes a $100,000 sale. Seller receives 20% down payment, of $20,000 and takes the balance of $80,000 @ 7% amortized over 20 years with a balloon payment in ten years. Seller pays $6,000 in commission, $635 for title policy. Seller pays capital gains on only the principal amount received each year. This year seller will pay 15% which amounts to $3,000. The advantages continue to get better. At closing the seller has expenses of commission of $6,000, title policy $635 and the State transfer tax is not paid till seller passes the deed to buyer when the land contract is paid in full. The seller’s expenses including capital gains am0unts to $9,635. Seller receives a net proceeds check at the closing table of $10,365. The monthly payments will be principal and interest. Seller will pay capital gains on the portion of principal repaid for each year, and income tax on the portion of interest paid for the year.
Now let’s calculate the money you are going to make each and every month and the balloon payment you will receive 10 years later.
- $10,365 cash at closing to use however you want to
- $620 per month which amounts to $7,440 per year
- Balloon payment of $49,594 after the tenth year of payments!
This compared to receiving cash at closing for your next real estate deal should have you looking at Land Contracts!
There are other issues we have not addressed. If you have any issues you would like more info on, respond to this post and I will address them.
Disclaimer: The above illustration is for a non-homestead property. If the sale had been a homestead sale using the federal ($250K for singles and $500K for married capital gains exemption) you would have saved the capital gain tax. Contact your tax preparer for advice. Net proceeds may vary depending on tax prorations and misc. expenses that buyer and seller negotiate.
Land contracts vary in the language used to accomplish the desired goals. For your specific real estate transaction use an attorney to protect your interest.
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