Posted by JohnBoy on January 23, 2000 at 18:42:05:
Actually, in a land contract, MOST of the monthly payment in the first several years is going towards interest, not the purchase price. In most cases a land contract is amortized over 30 years with a balloon payment due in 2, 3, or 5 years. When the balloon comes due you will have to refinance the balance owed to pay off the seller remaining principal owed.
Let,s assume you were buying a house for 57,000 on contract with an interest rate of 10% amortized over 30 years with a balloon due in 3 years? Your monthly principal & interest payment would be $500.22 per month. In 3 years you would have made $18,007.92 in monthly payments. The balance due in 3 years would be $55,946.29 to pay off your contract. You would have paid $5,615.91 just in interest and only $386.73 in principal that went towards the purchase price.
The other thing you need to consider is the liability involved with a land contract. In a land contract you have the obligation to purchase the property and make timely payments during the full term of your contract. Under a L/O you have the “OPTION” to purchase the property, not the obligation too. If for any reason you decided you no longer wanted to purchase the property you can just walk away when your lease is up. Under a L/O you can also limit your liability pertaining to the term of your lease. Instead of committing to a straight 3 year L/O you can break this down in 12 month terms for 3 years limiting you to 12 month leases over 3 years. You can structure the deal with a 12 month lease option with the right to renew your lease for 2 more 12 month terms. This way your only liable to pay rent for 12 month periods instead of 3 years at a time. If at the end of any 12 month period you decided you longer wanted to purchase the property you simply don’t exercise your right to renew for another 12 month term and walk away.
Under a L/O you can also negotiate to have $100 a month of the rent payments to be credited towards the purchase IF you decided to exercise your option. With only $100 a month in rent credits you will have $3600 paid towards the purchase price. If you got $200 a month in rent credits that would give you $7,200 towards the purchase price in 3 years. You could also structure the deal where your option price is for the actual mortgage balance remaining on the property the seller is obligated for. Much better than only having $386.73 paid towards the purchase price over 3 years at 10% interest on a land contract.
On a land contract you create more liability. On a L/O you gain control of someone else’s liability that gives you the option to buy Vs. the obligation to buy.