If Your Duplex Buyer Can’t Find A Bank, Be One

moneyLet’s face it. Due to foreclosures, short sales, job losses and tightened lending standards, fewer prospective duplex buyers can qualify for loans.

Ultimately, this translates to fewer potential buyers for properties, which contributes to declines in value.

Months and months ago I predicted we’d see the re-emergence of the contract for deed as a financing option. In recent days and weeks, I’ve begun to see just exactly that.

A contract for deed, which is sometimes called a land contract, is a means of financing a property in which the seller becomes the bank.

Of course, acting as the bank for a buyer carries inherent risks and rewards for a seller.

Benefits include:

  • A much faster sale, as there’s no waiting for mortgage underwriting or loans to be funded.
  • A way for a seller to simply get out of a property
  • A way to ultimately be paid more for the duplex than a traditional sale would offer, in that the seller would be earning interest as part of the payments.
  • Less stringent foreclosure laws which allow the seller to regain all rights to the property within 60 days of default, while keeping any of the monies from the payments or sale.
  • A way for an investor to spread capital gains tax over a period of years, thereby allowing for more comprehensive tax planning and savings.
  • The monthly payments may ultimately result in greater cash flow than was available to the seller as a landlord, without the headaches of maintenance and vacancies.
  • A balloon payment two, three or five years in the future, which allows the seller to retain the balance of their equity in a lump sum.

The risks of carrying a contract for deed can be:

  • Having to foreclose on the property, thereby being forced to manage and/or sell it all over again.
  • Having to make repairs after the foreclosure
  • Buyers may not have enough of a down payment to cover seller’s closing costs, resulting in the seller having to go into their pockets to pay the difference
  • Triggering a due-on-sale clause with your mortgage company.

Having weighed both the benefits and liabilities, many traditional sellers are finding a contract for deed to be a way to solve the problem of being stuck in a property they no longer care to own.