Valley Real Estate

Ultimately, the purchase price will be negotiated between Seller (Vendor) and the Purchaser (Vendee), however you still need a basis from which to begin those negotiations.

1. Comparative Market Analysis

   Have the HomeTeam prepare a CMA or Comparable Market Analysis  Using this method, comparables (properties that are comparable to the subject property in size and condition) are used to determine the market value of your property. This analysis will usually give both buyer and seller a pretty good feel for what the property should sell for if it were on the open market.

2. Independent Certified Appraisal

   The second method would be to hire an independent certified appraiser, satisfactory to both the buyer and seller, to do a complete appraisal of the property. Although this method is more expensive (from $150 to $500 or more), the value will be more authoritative. A REALTOR's CMA seeks to find the highest value that will attract a buyer. An appraiser is paid to deliver an actual value.  Although the goals are different, both will yield similar results.

1. We advise our clients never to enter into a land contract with less than 10% of the selling price in up front cash. The buyer must have at at least a 10% equity steak from the start to make the land contract secure. Anything less and the buyer may be willing to to just walk away from his/her obligations.

2. Also remember, that the larger the down payment, the more attractive a land contract will be to a third party, should you decide to sell the land contract to another investor or investment company. There is a very healthy market for good land contracts. (Key #10 - Selling All or Part of Your Land Contract for Cash.)

The interest rate on a land contract should be at least be equal to interest rates currently charged on mortgages by banks. and savings and loan associations (Freddie Mac's Primary Mortgage Market Survey® is one objective source). However, since land contracts are more risky than conventional loans we suggest that you peg the rate about a point (1%) to 1.5 points higher. (See Key#8 - Credit Worthness)

There are legal interest maximums in Ohio on land contracts between individuals. See your legal professional for details.

1. A formula of 1% per month on the unpaid balance at the time of sale is a good general rule. Here's an example:
   • $25,000 selling price of property
   • $5,000 (20% down payment)
   • $20,000 balance due
   • $200 monthly payment (1% of balance due); add to this one-twelfth of the estimated taxes and insurance.
      
2. On smaller land contracts (under $15,000), a monthly payment greater than 1% of the balance due is the norm.
    
3. Length of contract.

   To determine how long a contract will run given a certain interest rate and payment amount, call the HomeTeam and we calculate it for you free of charge. There are also many good sites on the Internet that will run an amortization.
    

Follow the lead of standard lending institutions who usually require the buyer to pay one-twelfth of the estimated yearly real estate taxes and one-twelfth of the estimated insurance costs each month in addition to the monthly payment. In this way the money is available to pay the taxes and insurance. when due. 

Also, since the land contract will run over a period of years, the property taxes could change. Therefore, be sure to include a clause in the land contract that provides for increasing (or decreasing) the payment when this happens.

1. If a Seller currently owes on a piece of property, they do not necessarily have to pay off the present mortgage. This is sometimes called a "Wrap Around Mortgage."

   The sellers will usually continue to make monthly payments in the required amount just as before the new land contract sale.

   The original obligation is often referred to as "underlying debt" since it "underlies" the debt owed on the more recent land contract on the same property.

   The danger for the buyer (or vendee of the land contract) is that the seller (or vendor) defaults on the original mortgage. A good attorney will write provisions into the land contract to protect the interests of the vendee in this unlikely situation. This is why you should always seek competent legal advise.
    

2. Beware.

   Sellers should check the land contract or mortgage they are currently making payments on, however, to see if there is a so-called "Due on Sale" clause requiring them to pay off the debt if they resell the property. Should there be such a clause, and the chances are very good there is, it is not ILLEGAL to move forward with a land contract, but there is a chance that the original lender may invoke the clause. Please consult with an attorney.
    

3. Finally, a Seller should require the land contract payment being received to be at least 25% greater than the payment they will continue to make to the original Seller.
    

How long a land contract is scheduled to run is referred to as the contract's amortization. A contract's amortization depends on the size of the contract, the size of the monthly payment, and the interest rate being charged. The higher the interest rate and/or the smaller the monthly payment, the longer the straight amortization will be. For this reason, many land contracts will include a balloon payment to pay off the entire debt long before the loan is amortized.

Therefore, although contracts may be written with 10, 20 or even 30 year amortizations, balloons usually are set for 3, 5 or 10 years from the date the contract begins. At this point the vendee either pays the remaining balance owed, or more often than not, seeks conventional financing.

Just like any lender, the Vendor has every right to information that shows the Vendee has an adequate source of income to pay the land contract obligation. They should request references, find out where the Purchaser works and the amount of his or her annual income, and obtain a credit report showing how promptly he or she is paying current debts.

If selling to a person with less than a commendable credit record, many Sellers increase the down payment and periodic payment requirements.

Many times the Purchaser or Seller does not want to put on public record all of the details of the financial transaction. In these cases a Memorandum of Land Contract can be drafted, signed by all parties, witnessed and notarized.

By recording this Memorandum both parties have put the public on notice that some agreement does exist regarding the sale of a particular property. This Memorandum filing is also cheaper than recording a land contract since Memorandums are typically only one page.