One of the very best ways to sell vacant land is to provide the financing. In fact, in today’s market where banks are not lending, you are cracking your field of potential buyers wide open by offering terms.
One of the best reasons to seller finance your land is the fact that you can charge market value or close to market value for the property. Cash buyers are often savvy enough to ask for a discount. Someone who is buying on terms is usually not in a position to drive a hard bargain. You can maximize the profit on your deals.
If you offer low down payments, a low monthly payment, and perhaps even a no qualifying deal, you can ask for full market value. Why? Banks don’t like to lend on land. Banks like to see a 50% loan to value on land, so it means that any buyer, even with good credit, would have to pay 50% down. If you offer a buyer a 10% or 20% down payment deal, you have just eased a large financial burden for them. In fact, you have opened up your market to people who don’t have a large down payment saved. Then you carry the balance on monthly payments. That gives your prospects more buying power. Because nobody else is willing to offer terms, you can charge a retail price for your property and you can charge a premium interest rate, too.
Here’s an example. Let’s use a lot with a nice round retail market value of $10,000.
You buy the property from a “don’t-wanter” owner for $1,000. You turn around and market that property, either using your buyers’ list, your website, online classified ads or an online auction site, for $8,000. Offer terms — $2,000 down, you’ll accept monthly payments of $121.66 over five years. That’s an 8% interest rate to you. More importantly, that’s an affordable payment for your buyer. You have made your investment back immediately; doubled it in fact! Now you have a monthly cash flow of $120. That’s all gravy. Your buyer got a good deal, a $10,000 lot for $8,000. You doubled your money plus got five years of cash flow. Total profit on the deal: $8,299.
Now $120 a month isn’t going to get you too far. But what if you had ten deals like this? Or twenty?
The obvious second advantage to offering terms is that it provides you with cash now and a cash flow for years into the future. Many investors fall into the “feast or famine” rollercoaster: Lots of money when a deal is done but times can get lean while waiting for a deal to close. Having a monthly cash flow can help even out your income stream. On higher priced lots, you can set the payments for a ten or twenty year term. That can make a very nice retirement income.
A good rule of thumb on the down payment is to require a payment that will return your entire investment in the property to you immediately. Sometimes you might take a little less than what you paid out on the down payment. You want to be able to recoup your entire investment within about three months’ time, with the down payment and monthly payments. If it is going to take longer than that, and you don’t feel good about the deal, look for another buyer.
How do you determine the payment price? First of all, you want your payments to be affordable to your buyer. Many people get greedy and charge a high interest rate. Yes, you can charge above market rates. But you don’t want to kill the golden goose. Keep the interest rate fair. Payments usually equal about 1% of the loan amount. So if the selling price is $30,000, the payment should be in the $300 – $350 range.
What happens if the buyer stops making the payments?
Financially speaking, this is really the best situation that could happen. It’s not something that you purposely set up when you seller finance, but it does happen. Because you made all your investment back with the down payment, you have a free and clear asset. Therefore, even with no payments coming in, the property isn’t costing you money on a monthly basis as it would if you had a mortgage. So you don’t have negative cash flow.
You do get to keep all the down payment money and all the payments that were made to you. The ownership reverts back to you and you turn around and sell the property again. This time around, the deal is all profit. Your return on investment is in the infinity range.
By providing seller financing, you are able to sell your properties much more quickly. The financing makes the property much more attractive to an increased pool of buyers. You aren’t stuck waiting for people’s financing to come through or worse, fall through. You can charge retail or close to retail price and you can create income streams for years to come. That’s a win, all around the board.