Land Contracts And Value

[Peggy Wright]

It is not uncommon to know that in commercial real estate, favorable financing and terms. So, if a homeowner who can not get traditional financing (self employed) buys on land contract with terms, and is willing to pay more for the house than someone who can get a lone, what is the best process to determine what the added value is?

 

[Farm Gal]

Ummm and you want to know ...WHY?

Is said home a subject property?

~We should not per Fannie Mae be making positive financing adjustments... sooo

Unless you want to use this thing as a comp
(and for me and my shop I would try mightily NOT to...)

Fer why/what do you have a need to know?

It might affect my answer!

 

[Richard Carlsen]

Without a copy of the land contract or the purchase agreement, it is impossible to know if there were any special terms, conditions or concessions.

You've brought up an interesting point that has bugged me for years; nay...decades. Where do people get the idea that just because someone sells on a land contract, this is special financing and from the buyers side, that houses can be bought on land contracts with little or no money down.

Sure there are cases where someone has a dog and the only way to get rid of it is to sell it to the first person who comes along with $2.15 on a land contract. But you as an appraiser should be able to spot these in a flash. Right now we are seeing L/C sales pick up a little in our market. Why? Have you looked at the CD rates at banks lately or noted the yield on T-bills? Some sellers who do not need their equity out are willing to take a contract and earn the 6 to 7 to 8 percent on their equity rather than take it out and put it in a CD or another property.

If you do not have all of the info on a L/C, I, IMNSHO, do not think that you are justified in making a blanket adjustment for a L/C sale.

Therefore, you have two options. 1) Use the sale "as is" assuming it is cash equivalent and market terms or 2) Don't use L/C sales at all due to your uncertainty.

 

[Stone]

I agree with Richard. In many of the rural markets in this area, LC's are very common. The terms here are recorded on the deed, and if they are not way out of wack, or if they are for just some short term financing, it isn't usually prudent to adjust for them. Once in a while you find an LC with really bizaare financing, but that is rare.

 

[Peggy Wright]

Well, the reason I ask is not due to a specific property. I belong to a real estate investment group and I know some investors who commonly sell to people on L/C that are self employed etc. They indicate they get more because they are selling on terms. So, it started making me think, ok, so, as an appraiser, how do we determine what the OPTION of buying on land contract is vs. buying conventionally. People are willing to pay more at a buy here here car lot, so I assume they are willing to do the same for a house. And in reviewing some of my appraisal materials, I know that on commercial with terms (though I don't do commercial) that is taken into account. I was just wondering how to do that for residential. A LOT of homes are sold in my area on L/C, probably due to the reasons mentioned above......better return for the seller.

 

[OCApp]

if my memory serves me correct, land contracts / contracts of sale (same thing in calif. ) are sometimes preferred by sellers(called vendors in land contract parlance) because it is generally much easier and faster to take the property back in event of nonpayment by the buyer(vendee). actual title to the property is not conveyed to the buyer/vendee until the terms of the contract are fulfilled. if the buyer/vendee defaults on the payments, the seller/vendor can take back the property much more quickly and without going through the statutory forclosure process. the foregoing may only apply in calif. -- i don't know for sure.

land contracts/ contracts of sale were very popular for single family homes in southern calif. many years ago(in the 1980s)when interest rates were high(17%)and sellers/buyers were attempting to avoid lender due on sale clauses. a buyer would purchase a property with so called creative financing(usually a contract of sale). with interest rates likely to increase next year and in the future, they may become popular again.

 

[Pat Butler]

I've bought and sold on contract lots of times. I can definitely get more money for a property when selling on contract and I can sell the contract too. Look at the sales prices for the houses that sold on contract and compare those sales prices to other similar houses-- basic matched pair type of stuff. I usually got 5-10% more depending on the buyers down payment and credit history. I usually bought at about market value- definitely not much lower because contract purchasing terms are getting really hard to come by here.

 

[Richard Carlsen]

Paul

Not in Michigan it isn't. In fact the laws covering the rights of land contract buyers make it more difficult for a land contract seller to get the property back than if they give a deed and take back a first mortgage. That is one of the reasons I do not make any adjustment for L/C's unless I know all of the terms. There are many sellers out there who, 25 years ago would have sold on an L/C but now they simply take back a first mortgage. Their security is easier to take back.

 

[Pamela Crowley (Florida)]

Whether the Land Contract or Contract For Deed sale involves a higher price for the terms is on an individual basis. I'm originally from Michigan and understand that Land Contracts are 'typical' in many areas of Michigan. They are rare here in Fla except for the investors that do inflate the sales prices for these (and all deals with their buddy LOs and skippy appraisers!!!)

So the answer here is "It Depends". I wouldn't think much of it where Richard Carlsen is. HERE is a whole different story and I avoid those sales as comps like the plague!!! I absolutely insist that a DEED must be recorded before I will consider it a comp also.

Basics:

#1: If an investor is involved in the deal, don't use it as a comp - or - find out everything you can about that deal, including going and knocking on the door of buyer and DISCLOSE everything. I don't bother trying to get the correct info from the investor because I've found they lied to me toooooo many times!

#2: If a deed hasn't been recorded, it ain't a sale. Richards area and others like it excluded BUT the land contract has to be recorded. The Land Contracts in Michigan that I'm familiar with include the total sale price and a form of a mortgage all in the one document.

If I think of more, I'll add more.

 

[Peggy Wright]

Thanks you guys (gals) I appreciate the opinions! Gives me things to look for/think about if I encounter these. Since I belong to the REI group, I know at some time I will probably be asked to do an appraisal for a L/C sale, so I really want to take a look into what is the best way to handle before I get one.

Peggy