One of the frustrations of being a land seller is canceling a contract. Canceled contracts occur in two situations. The first is when the land buyer defaults on their note by failing to make their payments. The second situation is when the customer willingly defaults on their purchase.
Newer investors are often disappointed and saddened by the loss of monthly income. You are trying to build momentum, and having to cancel a contract feels like taking two steps backward. On the other hand, more experienced investors rejoice when these events happen, and here’s why.
Let’s say we have a contract in which the buyer purchased the property on April 26, 2022, and canceled the agreement on July 3, 2023.
The sale price was $12,410, and we paid $5,312 for the land. As a result, our land cost us 42.8 percent of the sale price, which I refer to as Capital Recovery.
Formula:
Capital Recovery = Land Cost / Sales Price
Capital Recovery = 5,312 / 12,410
Capital Recovery = 42.8%
That means for every dollar of principle we collected from the buyer, $.428 represents our cost of the land—other businesses call this the Cost of Goods Sold. The remaining $.572 was our profit.
When the buyer chose to cancel their contract, we put the property back on the market. However, because each payment the buyer made covered a portion of our land cost, we took the land back at a lower cost.
This principle comes from accounting rules, primarily the Installment Sale Method. I teach this in the must-take class Accounting for Land Investors.
Using our calculation for defaulted loans, we see the land’s cost basis is now $4,117.38. The buyer’s payments over the fourteen months lowered our cost basis by 26.25 percent.
When we resell the property again, it will have a lower cost basis. Assuming the sale is at the same terms as the first sale, $12,410, our land cost will be 33 percent of the sale price, whereas it was 42.8 percent in the first sale.
Look at these Situations
Thanks to cancelations, we have ended up with some incredible deals; let’s look at a couple of home runs:
We took back an eighty-acre property in Pershing County, NV, in 2024. Its retail price was around $70,000, but due to the previous buyer’s payments, our cost basis is now less than $7,000.
In another example, we had a contract canceled on a .25-acre parcel in Lee County, FL; in 2024, this parcel has a retail price of around $18,000, and our cost basis is around $4,000.
While canceling sales is never fun, these situations result in greater profits in later transactions. So please don’t get discouraged when that loan defaults; remind yourself it’s a part of land investing. Then, focus on the future. You will be thankful for these opportunities.
