First it was the end of stated income programs.
Then it was word that as of August 8, Freddie Mac will restrict lending for investors who own more than four properties.
Regardless of market conditions, people will always need to buy and sell property. There are countless circumstances other than short sales or foreclosures that necessitate a sale. Perhaps a seller faces a job transfer, an addition to the family, a divorce, or has simply happened upon a better investment opportunity.
So how are those with less than perfect credit, who own five or more properties or work for themselves going to finance real estate?
My guess is we’ll see the re-emergence of the contract for deed, which is also known as a land contract.
With the impossibly low interest rates and readily available loans of recent years, this way of financing fell out of style. (Except in the case of farm land which is often difficult to obtain conventional financing for.) However, it was not an uncommon way to finance property in the late 1970’s, when interest rates hovered in the high teens and low 20s.
Quite simply, when a property is purchased on a contract for deed, the seller becomes the bank.
How does this benefit the seller?
1) it often results in a much faster sale. (No waiting for mortgage underwriting and loans to be funded.)
2) it offers a way for a seller to simply get out of a property
3) it can result in a seller netting more for the property then he/she might have through a conventional sale: via the interest earned on the note
4) much less stringent foreclosure laws protect the seller in the event of default
5) it offers a way for an investor who is cashing out to spread capital gains taxes over a period of several years
6) it can offer a consistent and greater income stream than renting the property out will
7) most contract for deeds have a balloon payment. The note is often due in full in two to three years (when the buyer obtains a conventional mortgage).
Most contract-for-deed purchases require the buyer to put 10 or more percent down. While this figure may be prohibitive for many buyers, there are also many benefits of purchasing property this way. I’ll talk about those tomorrow.