A Foreclosure From the Other Perspective

First place purchased on land contract.   It was just a shell when we got it.  No windows, no floors, just the logs.

First place purchased on land contract. It was just a shell when we got it. No windows, no floors, just the logs.

About six years ago I started playing real life monopoly in Alaska. I got into “family rescue” real estate investment. On my first trip to Alaska, near my friend’s cabin lived a couple with a three week old baby. They were living in the guy’s woodshop. The new mom was not happy about the situation. She wanted to move, but they couldn’t afford to. I purchased their place on a land contract to help them out. My friends offered to help me finish the places and my first corporate retreat center in Alaska was born. Over the next several years, I helped out several other families in similar situations. I’d help them move on in their lives, do a land contract and in a couple of years, own the property outright.

Then people started approaching me to purchase the properties. Some I’d sell, some I wouldn’t. I’ve done two of my own land contracts so far. One has worked out great, one not great at all. I’ve made some mistakes, I’ve learned a lot.

I started foreclosure on my first property yesterday. I’m not at all happy about having to do this. The person has not paid the mortgage since January 2008. And then started to rent the place out for at least twice the monthly mortgage – and still didn’t pay the mortgage. I gave the character plenty of chances to come good on the deal, and after numerous assurances, and no follow through, I am pushed into doing a foreclosure. Who is the loser in this situation? I’m going to have to fork over almost $7k to do the foreclosure. Do we ever hear from the lending institutions who are forced into doing the foreclosure because people are not paying their mortgage? My homeowner essentially had a place to live at half rent for a year, rent free since January and then an income source since May.

I predict that many more people will go into land contract deals as it becomes harder and harder for people to get conventional mortgages. Hopefully what I have learned here can help others. Here are my lessons learned:

1. Make sure that the person purchasing your property has to put at least 30% down. This way they have substantial skin in the game if they default on the mortgage payment and have a lot to lose if they just walk away from the property.

2. Charge at least a couple points above what they would get from a conventional bank on the mortgage. This way they are motivated to get another lender as soon as possible and you get all your money for the property sooner.

3. Don’t be swayed by a high credit score – that might mean they just got a small credit line and paid their bills on time. The credit score has absolutely no bearing on their intent or ability to pay on a mortgage.

4. Make sure they understand that you can and will foreclose on the property if they stop paying what they owe you. Get the appropriate legal guidance and follow it.

5. Don’t be swayed by emotional endorsements of the person’s character. It ultimately comes down to will they honor your deal or not. If they start to default on payments they need to quickly understand the repercussions are the same with you as they would be with a bank. Be kind, but firm. Direct them to resources that can help, but don’t become that resource. If you continue to bail them out, you will be enabling irresponsibility that will perpetuate the problem.

6. Set up the payback period for no more than 5 years with a balloon payment due at the end.   Make sure the payments are more than what it would cost them in rent.   With the mortgage that is now in foreclosure, the payments were lower than what it would’ve been in they were paying rent on a similar cabin in the area.  One would think this character would’ve done all they could to keep that type of deal going.

I’d do a land contract again, and I’d purchase property on a land contract again. I think it’s overall a good way to go. One bad apple doesn’t represent a bad tree.

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