Shared Apprecation On Land Contract?
I noticed that John Locke recommends a shared appreciation clause for land contracts. What percentage is typical? I also notice that John recommends a 2-3 year balloon on CFDs. Why so soon? The balloon stops your cash flow on the payment spread and limits the upside for shared appreciation.[ Edited by 4e6zbi102 on Date 03/30/2004 ]
What were you reading and where did you read it?
Quote:
On 2004-03-30 13:20, nebulousd wrote:
What were you reading and where did you read it?
Several posts by John here on _Creative Investor_. He mentions taking some of the upside as an additional profit center. Searching for keyword "appreciation" and user "JohnLocke" will point the way.
In additional to wondering what percentages of appreciation others were negotiating with buyers, that seems like more reason for a CFD buyer to refinance and stop your gravy train.
Okay, now I understand your question.
"I noticed that John Locke recommends a shared appreciation clause for land contracts. What percentage is typical? "
There is no clause. He sets the price based on the rate at which houses are appreciating for that area. There is no typical. So Your sells price comes from the appreciation over the course of 2 years.
"I also notice[d] that John recommends a 2-3 year balloon on CFDs. Why so soon? The balloon stops your cash flow on the payment spread and limits the upside for shared appreciation."
Well if you go off of what I said to your previous question...extending the contract out more means your going to have to raise your price over 5 years appreciation, or whatever number you set ... and that figure may turn a lot of people off because it may be a little high. Also, you have a better chance at predicting what the house will be worth 2 years from now as opposed to 5 years or more. And yes, this does stop your cash flow...sort of speak. But this is not the cash flow business...he is not buying for the cash flow....that is called renting. CFD, you are buying and selling for the equity. And personally, I would take a lump sum over 100-300 cash flow any day...look at the people who win the lottery.
Quote:
On 2004-03-30 14:57, nebulousd wrote:
Okay, now I understand your question.
"I noticed that John Locke recommends a shared appreciation clause for land contracts. What percentage is typical? "
There is no clause. He sets the price based on the rate at which houses are appreciating for that area. There is no typical. So Your sells price comes from the appreciation over the course of 2 years.
I see. If that's the case, I see several problems. I'm in Vegas. Two years of appreciation is 40-50% right now. Raising the price up front that much means that you'll not only drive away buyers, but pay taxes on gain you haven't realized. A shared appreciation clause can be written so you get 1/3, or 1/2, or $25k+1/2, or "$25k or 1/2 whichever is more", of the appreciation after the fact. The point is two-fold: you don't scare the buyer with an outrageous price, and you pay tax only upon sale/refi rather than up front. Buyers are much more willing to give up a nebulous future benefit than they are to give you a high price now. If you set a minimum like one of the above examples, you can get both your equity spread and a share of any extraordinary upside.
Quote:
And yes, this does stop your cash flow...sort of speak. But this is not the cash flow business...he is not buying for the cash flow....that is called renting. CFD, you are buying and selling for the equity. And personally, I would take a lump sum over 100-300 cash flow any day...look at the people who win the lottery.
If you can get 20 CFDs running at once (realistic?) at $300/month that's $6k/month cash flow. Pretty sweet, and much more than you'd get renting in most any market these days. You can afford to wait for a much larger share of the upside than you'd likely get asking for it up front in your price. Of course, if you're in a 5% annual appreciation market, getting all your equity up-front makes more sense.