Land Sales Contracts:
An Alternate Path to Orange County Real Estate
No one can deny that the Orange County real estate market is slowing down. Orange County homes may have sold like the proverbial hotcakes in the past, but these days they are lingering on the market for longer periods of time.
Normally, you would expect such conditions to drive the price of Orange County real estate down, but this is not entirely the case. Prices for Orange County homes still remain high in relation to the market slowdown. Thus, home buyers in places like Fullerton, Anaheim and Yorba Linda still face mortgage-qualification obstacles, despite the general slowing of the real estate market.
So you end up with a situation where the seller really wants to sell, but the buyer simply cannot qualify for the mortgage in order to purchase the home. How does one bridge the real estate gap in such a situation?
Home sellers have another option available to them, and it just might be the way to bridge that financial gap and get the home sold. It is called the land sales contract, also referred to as a "contract for deed" or an "installment sales contract."
It works like this.
The buyers and seller enter a real estate contract wherein both parties agree to allow a third party (usually an attorney or escrow agent) to hold the home in escrow. Then, the home buyer agrees to make what equates to installment payments -- a fixed amount paid to the seller each month.
These payments would continue until (A) the full sale price has been met or (B) the buyer eventually qualifies for the financing they need to pay the full sales price. In either case, the seller will be paid in full for their home. Once the full sales price is paid by the buyer to the seller, the deed is finally transferred to the buyer.
This type of real estate agreement offers the seller certain benefits. For one thing, the seller legally owns the property until the buyers pay the full sales price. There are other options similar to the land sales contract, but they often lack this level of simplicity.
An Installment Sales Scenario - Fullerton Real Estate
Let's look at an example using fictitious buyers and sellers in Fullerton, California. Let's say that John and Jane Smith want to sell their Fullerton home for $600,000, which is realistic based on their particular property and the Fullerton real estate market at the time of listing.
Let's further assume that the Smiths own the home free and clear (the lucky dogs!) with no more mortgage payments remaining.
Along come Sam and Sally Jones, who are upgrading to their second home in Fullerton, California. The Jones fall in love with the Smiths' home, but they cannot obtain the financing to pay the full asking price up front. So, the Jones offer to pay a ten percent deposit ($60,000) and then pay the rest ($540,000) in monthly installments -- a real estate payment plan, basically.
In addition, the Jones and the Smiths agree on an interest rate to go along with the monthly payments. The Jones (the buyers) have also agreed to pay the homeowner's insurance and real estate tax on the Fullerton home.
Advantages and Disadvantages
For the Seller:
So how does the seller benefit from this land sales contract with the buyers? Well, for one thing, the sellers do not have to maintain the property, which is a big burden lifted from their shoulders. They will also be getting a decent return on their investment, due to the mutually agreed-upon interest rate and sales price.
The obvious disadvantage is that the seller will not get the full proceeds all at once. But in a real estate market such as Fullerton, California, this might be an acceptable downside in order to move the final sale forward.
For the Buyer:
The primary advantage for the buyers, of course, is the fact they can move into a home that would otherwise have been out of their reach. So in essence, they have sidestepped their inability to qualify for the full mortgage amount by making payments on the home while it is held in escrow.
But What If There's Still a Mortgage?
In the Fullerton real estate scenario above, the sellers owned the home outright, meaning there was no outstanding mortgage to factor in.
But what if the seller is still making mortgage payments on their Fullerton, California home? Well, the same basic process could be pursued, but now things are a little more complicated. If the seller's mortgage has a "due one sale" clause (which most mortgages do these days), the land installment sale process would still be possible.
So when in doubt, the sellers must ask their mortgage lender if a land sales contract / land installment sale is possible under the terms of their existing mortgage.
Negotiation and Mutual Agreement to Details
Before entering into a contract for an installment sales process, the home buyer and seller should work out all of the payment terms and other details. One "detail" of importance is the default scenario. What happens if the buyer defaults (can no longer make payments)?
The obvious first step in a default scenario is that the buyers would have to move out of the home. That kind of stipulation is easy to agree upon. But where sellers and buyers often disagree on this issue is the money paid up to the point of default. Under such agreements, sellers will usually require the buyers to forfeit the money paid prior to default.
But this is hardly agreeable to the buyer, for obvious reasons. The argument in favor of the seller is that the money paid up to the point of default essentially becomes rent, since the buyers lived in the home for that period.
The bottom line here (literally and figuratively) is that these issues must be resolved and put into writing prior to entering into the contract. In that regard, it's like anything else in real estate.
An Alternate Path to Orange County Real Estate
This is only an introduction to the land sales contract / installment sales contract. If you were to consider this for your own real estate needs, you would obviously have to do more homework on the issue, and perhaps speak with a financial advisor about it. The goal of this article is merely to let you know that this option exists, and that it could very well be the key to success with your Orange County real estate process.
About the Author:
Bob Foust is the chief executive for the FOUST Team at C21 Discovery; one of the top-selling real estate teams in Southern California. He specializes in Orange and Los Angeles Counties and operates one of the area’s most informative real estate websites. To contact him or learn more about Orange County real estate, please visit www.FOUSTonline.com.
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