CREATIVE TRANSACTIONS REQUIRE MORE EXPERTISE

It’s been nearly 30 years since the last significant real estate downturn in Michigan. That occurred in 1981 and was primarily driven by double digit interest rates. Mortgage rates peaked at about 18% then and real estate sales would have come to a screeching halt, but for many sellers having the ability to convey property via land contract.

Real estate sales are now being impacted by factors that are much different. While interest rates are at all time lows, sales are being hampered by the HVCC, buyers with wounded credit scores, sellers with little or negative equity and buyers wishing to buy with small down payments. In short, market dynamics today are completely different than in the early 1980’s.

Lately, there has been much discussion among real estate practitioners about returning to the use of land contracts or purchasing money mortgages to help create more sales by avoiding some of the issues mentioned above. We have already seen the proliferation of longer term leases and lease/option transactions over the past few years.

There certainly are instances where creativity in structuring a real estate transaction can benefit both the buyer and seller. There are many more instances, however, where such transactions are neither appropriate nor in the best interest of one or both parties to the transaction. Consideration should be given to the following in determining whether such a transaction makes sense.

• Underlying financing – Sellers typically require significant equity to facilitate a land contract sale. There are “due on sale” issues with respect to their underlying mortgage. Even if those are resolved by acquiring permission from the underlying lender, the monthly payments due under the land contract normally need to match or exceed the payments due on the underlying mortgage plus property tax and insurance payments.

• Creditworthiness of buyer – The seller assumes the risk as the lender in a land contract sale. The buyer’s ability to make the monthly payments becomes a critical issue to the seller, unlike a conventional sale.

• Down payment –Land contract sales normally require significantly higher down payments than under other types of financing. When land contract sales proliferated in the 80’s, down payments on all types of financed transactions of 20-40% were typical. That is not the case today.

When contemplating a land contract sale or lease/option of any kind, additional expertise must be brought to the transaction. Advice from outside counsel and/or a CBWM manager with this specific knowledge should be sought.