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Land contracts can be an excellent alternative to a traditional mortgage, both for the buyer and seller. The seller assumes the role of the lender and gets regular payments from the buyer while still holding the property title. There are many advantages both for buyer and seller; but from the seller's perspective, land contracts also come with some serious risks. Before considering a land contract, make sure you know the ways you can protect yourself and avoid potential issues.
Here are some of the best ways sellers can protect their interests when offering a land contract:
Get a Credit Report
While a credit score can’t tell you everything, it gives some insight into a buyer’s financial situation. Debt-to-income ratio, good payment habits and the number of longstanding accounts are all important details you can use to determine your risk when offering a land contract.
Confirm Employment Status & Income
Rental applications, mortgage applications and more all require proof of employment for a certain amount of time. Ask for copies of pay stubs, direct deposit receipts or other proof of employment status for at least one year to make a safer decision on a buyer.
Ask for References
Another thing mortgage lenders do is ask for references. Most of the time, they want only employment references, but sometimes personal references are included as well. Contacting a reference can be an excellent way to learn more about a person and their level of responsibility when entering financial contracts. This is also another way you can verify employment status.
Require Title Insurance
Title insurance can tell you important information about your buyer and their property history. In particular, it will show if there are any liens or other issues you should know as a seller.
Charge a Down Payment
Asking for a down payment is optional in a land contract but a recommended way to protect your interests as a seller. A large down payment will give you a financial safety net in case the buyer has to break their contract or cannot make payments. It also shows a higher level of commitment from the buyer—somebody who pays a large sum of money up front is less likely to back out of a deal.
Using a land contract to sell your property is a great way to make some regular income and simplify the sales process. However, it also comes with all the same risks mortgage lenders and banks face when loaning money. Using these tips will help you choose the best potential buyer for your land contract and protect your interests as a seller.