Land contracts – A letter from Peter

June 9, 2009

Dear James,

I read one of your articles on Biggerpockets about three ways to buy real estate.  You mention a ‘Land contact’.  I have never used one of these before.  Would you have a sample that you could send me without names and data so that I can see what they are like?  Thanks,  Peter

Hi Peter,

Land Contracts are a bit more popular in certain areas than others. They may also be called something different in other locations, such as “contract for deed”,  “installment sale”, or “trust deed”, etc.

It is essentially and agreement where the seller acts as the bank. The difference between this and simply holding a first mortgage is that the deed stays in the sellers name until a certain equity point has been reached by the buyer (often a complete payoff).

This arrangement gives the seller more protection and control than transferring the deed and just holding paper would.

The seller usually still has to foreclose on the land contract as the buyer does have a level of ownership/equity interest under the contract.

Here are a few sites with good information on Land contracts:

Take care,


Real Estate Investing – The Greater Good

February 6, 2009

Real Estate Investing – The Greater Good
by James Miller

So much of the focus on Real Estate Investing seems to be on making money. That is the first and truest motivation for what we do.  I feel that there is nothing wrong with this. Being a capitalist, I think anything that gets the Money moving in our economy actually does us good.

But before I turn this into  Gordon Gekko’s Greed is good speech, I want to talk about the other side of what we do, when we buy or sell a place using creative real estate techniques.  I want to talk about how it helps people and the overall good it does.

Think of the benefits to our local economy and community when we do the following investing action:

When we buy a fixer upper, repair it, and resell it with seller financing:

1) We are saving this home from further ruin that time can create. At some point homes become so deteriorated that after enough time only the only choice is the wrecking ball. By saving these homes we are indeed recycling them and keeping a large amount of material out of the landfill.

2) We raise the property values in the local neighborhood. This may or may not happen to any significant degree, but it makes it easier to sell your house if it is sitting next to a freshly  restored Victorian, as opposed to being next to something that looks like a haunted house.

3) We increase local tax revenue. While we never like to see it coming, we benefit the community by creating more assessed value in a home that benefits the tax roles.  This is a dollar savings that  minutely lowers everybody elses taxes.

4) We minutely lower the cost of housing by providing another viable living space.

5) We give hope, usually to a family that is transitioning from renting to the American dream of home ownership.  We are providing renters a way to start building equity in their home even though they may not be able to qualify with a bank right now.

6) We give hope, to the seller we buy from who could not move their home otherwise. This is especially true in this tight market.  I have talked to Realtors who have sold nothing over the past six months.

With our ability to sell via lease options and other creative means, we are constantly and consistently able to sell homes.

7) We are good for the economy. I believe that if there were a massive push from our government to educate it’s population on the ways of creative Real Estate Investing we could pull out of this economic slump without the need for huge bailouts.

The banks would still have to take a hit, but a nation of savvy and creative Real Estate Investors and home buyers could eliminate the inefficiencies in the market.

If you think about all of the people out there right now who would gladly rent or sell their property with creative financing, just to get out of it, but they don’t know how, so they are letting it go into foreclosure.

Compare that against the amount of people that are ready, willing, and able to come up with a little money down and make the monthly payments in order to get into a home of their own… but they don’t know these options exist.

If you compare these two things then we know that there is room for us to make a difference in our economy without a huge infusion of bailout cash.

…..Then again, maybe I am just an idealistic dreamer.

Since posting this I have read Francine Hardaway’s open letter to two mortgage companies. In her blog, she talks about how much better things would be for her and her lenders if  they would accept a reduced interest rate as opposed to her only other option…Foreclosure.

How to avoid a Real Estate lawsuit

February 5, 2009

How to avoid a Real Estate lawsuit
by James Miller


I have been investing in real estate for 13 years and have not yet been taken to court.  I have had to sue and evict tenants that didn’t pay, but I have never been to court as a defendant over a Real Estate deal.

I have gotten in a  “discussion” on a Real Estate Bulletin board where there seems to be some strong feelings as whether or not to use a purchase and sale agreement when taking over  a property “subject to”.

I have an attorney who  adheres to the KISS principal and that any time you can get by without using a piece of paper, you do so.  He feels this way as any document you create or sign can be construed two ways, for you, or against you. As I understand it, the court looks more critically upon the person who provided or drafted a document.

It occurred to me that the reason that people feel so strongly about their need for legal documents is that they want to feel protected. They are afraid that if they don’t have the right piece of paper someone will get them.

It is my contention that if you focus on helping people, treating people fair and honestly and if you don’t try to take advantage of them then you could get by with very little documentation.  If they are in agreement with what you are doing, there is no reason for them to sue.

Here are the things I try to do to keep that from ending up in court:

1) I don’t make promises I can’t keep.
I certainly don’t sign any agreement where I am agreeing to do something that I don’t think I can do.  I tell people where I sit with regard to the deal and make sure that

2) I make sure my intent is clear.
If I ever end up in court and there is an issue over a series of events, I want everyone to know what I was trying to do.  If possession is nine tenths of the law then intent has to be the other tenth.  It is awfully hard to misinterpret events if the intent was clear.  I will often times use a non-committal letter of intent to fill in the blanks on any understanding that I have with someone on  a  Real Estate deal.

3) I don’t piss people off.
I don’t get in arguments on a $100,000 Real Estate deal over a few hundred dollars.

I seek first to understand what they want to tell me, and then let them know my position.

I try to sandwich bad news with two positive things.

I let them know that we are in it together and I am doing what I can and that I am always going to be fair honest and open with them.

I feel that the main reason that people end up in court is that they get upset because they feel that hey have been taken advantage of, or wronged in some way where the other party will not make it right.

4) If I wrong someone, I make it right.
Often times I will go above and beyond to make it right.  I believe that there is a certain inertia or stickiness to the way a person feels about you.  If they like you it takes a lot for them to not like you, if they don’t like you it takes a greater effort to make them like you again.  By doing more than what is expected to make something right, you can overcome the inertia of dislike.

5) I keep my properties in LLC’s and Hire out much of the work I need done.
In order to be sued, you either need to do something, or have something.  By keeping the properties in separate LLC’s or land trusts I limit the amount of exposure that any one property has. By having others do the work, I limit my own personal exposure to lawsuits, by not creating damages or negligence through my actions.

While nothing can keep you completely safe from getting sued, I think these things have helped to keep me on the plaintiff side of the courtroom.

There are only three ways to buy Real Estate

January 26, 2009

There are only three ways to buy Real Estate.

by James Miller

Yes there really are only three ways to buy Real Estate.

When you get started in Real Estate investing it can seem like there are hundreds of buying techniques you need to know.  In reality there are only three ways and every other method you think you know is just a variation of these three.

1) You pay the seller cash

2) You get terms from the seller.

3) You and the seller agree on some combination of cash and terms.


You pay the seller cash.  It doesn’t have to be your cash, you can borrow if from a bank, a hard money lender or from an individual.  You can partner up with someone in either a debt or equity financing position.  You can borrow from your 401K.

It doesn’t matter where the cash comes from, it just means that the seller is getting completely paid off at the time of closing.

Cash is one of my least favorite ways to buy, unless I can use an all cash offer to drive the price down through the floor.  I am talking 30 cents on the dollar kind of thing.

You buy the property from the seller “subject to” the existing financing, by using a wrap around mortgage, land contract, or rent to own/lease option type purchase, or by having them carrying the whole first mortgage.

Most of these will require some small outlay of money, but in Real Estate terms I consider anything costing you under a few thousand to get into a property “no money”.

Terms means that the seller (or his lender) is not paid off when you take over the property, and that there isn’t any sort of significant down payment being transferred to the seller.

Terms from the seller is one of my favorite ways to buy property.

Combination of Terms and Cash
You pay the seller a portion of the purchase price in cash and they finance the rest for you in some way.  It could be that they carry back a first mortgage, a second mortgage,  use a land contract, lease option, wrap around or even “subject to”.

This is the most frequent way that I purchase property.  Sometimes I decide to catch up a mortgage in order to take over a property “subject to”. Other times the sellers want a down payment to feel comfortable carrying back a first mortgage on the property.

Buying property really is just this simple.  Don’t let the details of the multitudes of creative techniques confuse you.

It always comes down to one of these three ways.

How to Market your property in this Market

January 23, 2009

How to market your property in this Market
by James Miller

I am assuming that you are in the same boat as a lot of Real Estate Investors. There are plenty of deals out there to buy, but how do you unload the ones you already have.

Here are a few of the techniques I use for unloading properties in this market.

Tip#1:   You have to make it easy to buy your property.

If you try to sell your home or investment property traditionally, and by that I mean looking for offers that completely pay you off the day of the closing by being either the all cash, or bank loan types.  you will have severely limited the market that you can sell to.

Things have already gotten tougher as 720+ FICO’s and 20% down are now virtually standard. You can also bet that appraisers are not as lenient with their property valuations as they once were.

Here is a list of my alternative selling methods.

Lease Option
You can think of this as a rent to own type program where you get a substantial down payment as option consideration and in exchange you agree to sell the property to the buyer at a given price within a certain time frame.
The tenants are buying the home and tend to take better care of it. You can also get higher than market rents, by agreeing to put some of their monthly payment toward equity build up.
Since the Deed does not transfer until they cash you out with a bank loan, you get the added benefit of being able to write off the depreciation.

Carry back a Second
In this scenario you agree to hold a note for some portion of the purchase price.  This amount can often times be credited toward the down payment amount that they need to bring to closing table making it easier to buy.  The amount of a seller second is often limited by the lender of the first mortgage to a certain percentage, typically 5%, or 10%.
The Deed will transfer so getting your money back if the sellers default can require a foreclosure action. You are also second in line behind a lender who may eat up all the equity in the property in a foreclosure.

Carry back a First Mortgage
If you own a property free and clear, or if the buyers are putting down enough to eliminate any mortgage you have on the property you can hold a mortgage in first position, essentially becoming the bank for the seller.
The Deed will transfer so getting your money back if the sellers default can require a foreclosure action. You are in much better position by holding the first.

Land Contract, or Contract for deed

Similar to a rent to own scenario, but the buyer has a much stronger ownership position.  Many banks will allow a Refinance after a buyer has proven himself or herself under a land contract. The deed does not immediately transfer, but you may need to bring a foreclosure action in the event of a default sue to a stronger ownership position.

Tip #2: Your property needs to have an edge

Anything you can do to differentiate yourself from the competition will help in this respect.  This is kind of like my “why houses need a hook” post.
One of the properties we rehabbed started as a four bedroom one bath home.  We decided to turn one of the bedrooms into two bathrooms making it a three bedroom three bath home. While losing a bedroom is not something you typically want to do, I knew the three bathrooms would give us an advantage over other homes of the same caliber when listed on the MLS.

There are a lot of three bedroom two bath homes out there, but not nearly as many three bedroom three full bath homes.

Tip #3: You will need to spend more on marketing
It is easy to sit back and blame the down market for a lack of results, but the truth is that we are still getting calls on our advertising and the number of calls is always a direct result of how much advertising we do.
It doesn’t feel good to be less results for the same amount of money, but advertising is a cost that directly relates to sales. If the sales numbers for the same marketing dollars spent are dropping,  it is harder and more of a waste of time to try to come up with better, more creative advertising, when you know that increasing your marketing budget will bring you the traffic you need to sell a property.

The Housing Market – run for cover or buy like mad?

January 15, 2009

The Housing Market – run for cover or buy like mad?
by James Miller

We are scared.  That’s surely no secret, but what can we do about it?

I have a technique I use when I feel myself becoming afraid or apprehensive about any situation.  It has served me well and I find it somewhat elegant in it’s simplicity.

Whenever I am faced with something that I either don’t know how to handle or is confusing me, I ask myself the following question:

“What is it about this situation that I don’t yet know?”

Then as a follow up I ask

“What can I do about it?”

It seems pretty simple, maybe too obvious for some to believe, but when I ask this question aloud, my mind always seems to answer.  When I get that answer it allows me to take action to to relieve that fear.

So in this market, we can ask ourselves “What is it, that we don’t know, that is making us afraid?”.

What immediately pops into my head is that we have no idea whether housing prices are going to go any lower.

Now what can we do about it?

Well… nothing really.

Nothing to change the situation that is, but you can position yourself to avoid the pain of falling home prices.  What this means to me is that I am not going to go out and sign on the dotted line for any new loans any time soon.   There are, however,  ways to buy property with little or no money down and no personal guarantees.  If you can do that then you have an automatic safety net built in.

In fact, wouldn’t it make sense to so that all the time anyway?

The other side of this is that the market very well may be at a relative bottom and if it is, wouldn’t this be a good time to start buying property?

On the opposite side of fear is greed.  In market terms fear is fast and greed is slow.  And fear always trumps greed. This means that it will likely take a while for this market to turn around, and when it does the climb will be slow.

Now is the time to be talking to sellers about buying their property using seller financing terms.  Taking over a property “Subject to” the existing mortgage is one of my favorites, followed closely by the seller holding a first, land contracts, and lease option purchases.  None of these should require you to personally guarantee the debt.

If you can couple these types of purchases with the possible future potential for the market to turn around, you can have no credit risk with a significant upside potential.

If you can get good at negotiating with sellers to be able put very little money into the properties you are buying – or be able to take money out of them as you buy- you will have very little financial risk as well.

With all of those pieces coming together,  the fear can be eliminated.

Compare seller financed deals with the current very common practice of buying foreclosures from banks.

Foreclosure purchases can often have strict down payment criteria and still require you to personally guarantee the debt. The two things you want to avoid if you are afraid of the housing market once again pulling the rug out from under you.

Yes, there can be some deals in forecloseures, but when you aren’t sure where the bottom of the market is, do you really know that are getting a good deal, or is it still just speculation with a different face?

Buying with Nothing Down

January 9, 2009

Buying with Nothing Down
by James Miller

While It’s easy to love the idea of a nothing down deal, I do want to start off by saying that Just because you can get a property for nothing down, doesn’t automatically make it a good deal.  The no money down deal structures I am going to be talking about assume that the deal makes sense otherwise.

There are a few basic ways to structure a deal to get in with little or no money out of pocket.

Have the seller carry back a second mortgage

This can be used with a conventional purchase where the bank will accept a second mortgage from the seller in lieu of some or all of the required down payment. The seller agrees to take back a note and mortgage from you for some portion of the purchase price.  The terms of the sellers carry back note are all negotiable.

Some banks won’t accept a second mortgage or will still want some percentage down, as they like to see a buyer with something at risk. The more equity you can find in a deal, the more receptive the lender will be to taking on a second mortgage. If the lender in loaning on a low LTV, the more likely it is to be accepted.  For example if you can get eth seller to take back 50% of the purchase price, the lenders position would be relatively safe if they were to loan the remaining 50%.

The fear lenders have with seller carry back seconds is that you may be intentionally, or unintentionally overpaying for the property. That the real value of the property may truly be at or below the amount they loan. The more secure you can make a loan for them, the more receptive they will be to financing the property.

I have used this technique to actually get cash back at closing, essentially financing the property for more than the purchase price.  The seller agreed to take back a 20% second for one year with no interest and low monthly payments.  After one year of ownership and making the property cash flow, I was able to refinance the property and pull out enough to pay off the original second. I 100% financed the property right from the start using the sellers help.

This can often work well with sellers that own a property free and clear. The less equity a seller has the less able they are to be able to take back a note.

Eliminate the bank and have the seller finance the purchase

This can happen using a land contract, a first mortgage, creating a wrap around mortgage, taking by over the existing financing “subject to”, or under a lease option.

Buying using seller financing

January 9, 2009

Buying using Seller Financing
by James Miller

When I first started Investing in Real Estate I remember wondering why seller financing  was such a big deal. It seemed as though every guru out there was talking about how the best deals come with some sort of seller financing.

To me it seemed like it would just be a hassle. Even though I was starting out, I had good credit and enough cash for a down payment.  Surely any deal that I could get with seller financing, I could get for cheaper if I cashed out the seller by getting a loan.

I started out buying rental properties.  It didn’t take me too long to figure out that if I was just going to buy one or two properties, using my cash and my credit probably wouldn’t make too much difference, but if I wanted to get A LOT of property under my belt, then going to the bank and putting down 20% every time was going to quickly get very expensive.  I couldn’t keep coming up with 20% down payments without limiting how fast or how much I could buy.

Every time I got a loan for a property it would affect my credit score. It also threw off my debt to income ratios, as the bank only credits income from income property at 75% of what you actually get in.   It seemed like it would take a long time to get back the $23,000 I put down as a down payment at $100 net rental income per month. Some months repairs were needed , so I didn’t even get that much, or worse, had to take money out of my pocket to pay for them.

I also learned that just because a seller is open to offering some sort of financing, doesn’t automatically make it a great deal.  Most of the time my initial assumption was correct, I could get a better price by just offering cash, but sometimes seller financing terms can make the deal.  What it comes down to can be summed up by this statement:

Good seller financing should allow you to use less money, and less credit than you would be able to otherwise.

I found that while I may pay a small premium in price, if I am diligent in my shopping, I can still get a great deal by using  land contracts, and seller seconds.  Many times sellers are so stuck on their price that they fail to think of the time value of money. With other sellers I think it becomes a matter of pride taht they have to get the price they have decided on.  They get stuck on “I need to make $10,000 on this place”, or start thinking “I won’t take any less than $100,000”.  I hate to admit it, but we men can be particularly bad this way.As sort of an example I also have to tell you about a deal one of my partners just landed. She negotiated a purchase price of $47,000 on a three bedroom one bath riverfront home on two acres, with terms of $20,000 down and the seller holding a no interest, no payment mortgage for the balance.

Now this is a fixer upper, but besides getting a great price, she was also able to get great terms.  Yes there is a need for a $20,000 down payment, but at less than 50% LTV you can get almost any hard money lender to give you a loan on it.  Her exit was to assign the contract for $8,500. sounds like hefty price, but the woman she assigned it to was savvy enough to see that there was a ton of room for her to make money in the deal and look past the $8500 check she wrote. She will need to put a little bit of money into the place, but after repairs it will be worth around $120,000.  (Yes, even in today’s market).

It may not be as clear in this example, but my partner set up a deal that was easy to finance. No matter what your credit looks like you can almost certainly find someone to loan you 50 cents on the dollar.

Could she have shaved off a few thousand more by offering all cash?

Probably. but the terms more than made up for it. An all cash offer would have made it just like any other deal.  The price would have still been good, but the deal wouldn’t have that edge, that advantage that all investors are looking for.

The exit she used out of the deal brings me to this point:

Great seller financing allows you to use little or no money and none of your credit.

She had put down $10 as an earnest money deposit on her offer to the seller. That was all that she had at risk.  Had she not found a buyer for the contract right away she could have dropped her price,  decide to purchase it herself and do the rehab, or let the contract go.  Unless she decided to buy the property, her downside was very limited.  Her position involved none of her credit and very little of her money.

In real estate terms, I consider $10 as “no money”, but I want to be accurate in my reporting of the events.

Please understand the $10 wasn’t really part of the financing, but it correlates to the idea that the less you have in a deal at any one point, the less risk you have. Would that seller just as easily taken $100 or $1000 for an earnest money deposit? You bet, but my partner had the nerve to not be uncomfortable asking them to take less to secure the contract. She instead focused on getting the sellers a deal that would work for them and treated the earnest money as a secondary concern.

The nice part about the way she set up the deal was that by taking back a mortgage, the seller still had a hand in the deal. This always makes me feel a little better as it shows me that the seller probably isn’t hiding anything.

Buying homes “subject to” the existing financing is one of the best ways to get into a property without using your money or credit. The sellers name stays on the mortgage until sometime in the future. These sellers often times have little or no equity, so you can usually get by without putting any money into the deal outside of minimal closing costs.  I have even taken over properties “subject to” where the seller comes to the table with money and pays me to take the property.  It’s nice when your credit is not at risk and you get money at the closing.

If you are new to real estate investing some of these deals may sound far fetched, but I can assure you they are out there. I have done them.  It just takes more time searching for them than most would like to spend.