What is a Land Contract?

A Land Contract is a type of owner financing that allows the buyer to make payments to the seller for a home or land purchase. The buyer gets to use the property but the seller hangs onto official title until paid in full.

The contract comes under several names including Real Estate Contract, Contract for Deed, Installment Sale, and Land Contract. It is an alternative way to document the seller financing arrangement from the more common Note and Mortgage or Note and Deed of Trust.

One big consideration with a Land Contract is that the buyer will not receive the Warranty Deed to the property until the purchase price is paid in full. That means the seller stays in control as official title holder while the buyer makes payments. Think of the contract like a layaway program for the Deed.

So what’s the big difference? Well with a Deed of Trust or Mortgage the seller provides a Deed to the buyer at closing, transferring title to the buyer. Then the buyer simultaneously gives back a Purchase Money Mortgage (or Deed of Trust in some states) to the seller for the portion financed. When the amount financed is paid in full the Lien is simply satisfied.

When the seller holds fee simple title using a Real Estate Contract the buyer is holding equitable title. Since the buyer does not yet have the Deed it is almost impossible for the buyer to obtain any type of secondary financing unless the Contract is paid off.

The buyer also risks the seller encumbering or clouding title before the Contract is paid and the Deed released. To provide greater protection, the Fulfillment Warranty Deed can be held in trust by a third party escrow servicing agent

If the buyer quits paying and the seller needs to take back the property, a Real Estate Contract has the advantage of being faster and less expensive than a drawn out foreclosure process on a Mortgage or Deed of Trust.

The accepted use of a Real Estate Contract varies by state. They are common in many Western states like Washington, Oregon, Idaho, and New Mexico along with some Mid-Western states such as Michigan and Wisconsin. However a few states, like Texas, have passed regulations to prohibit use of Contracts for Deed.

A Real Estate Contract can be unrecorded or recorded at the county level depending on local practices. A seller can also sell contract payments for cash now. Just know that some investors may require conversion to a note and mortgage or a note and deed of trust.

A knowledgeable title company or real estate attorney can assist in selecting the best method of documenting the seller-financed transaction.

For more information on buying or selling with contracts read Personal Profit Series: Notes – The Complete Money Making System to Buying, Referring, Creating and Holding Real Estate Notes!

5 Owner Financing Tips for Sellers

It’s a tough time to sell a house.

In an effort to sell fast and stand out from the crowd, sellers are turning to the owner financed installment sale. By accepting payments over time from the buyer, the seller provides an alternative to bank financing. This attracts more buyers and helps the owner get attention in a market flooded by oversupply from foreclosures.

Of course sellers don’t want to jump from the frying pan into the fire by trading a house that won’t sell for a buyer that won’t pay.

Here are 5 safety tips for sellers considering an owner carry contract:

Tip #1 – Review the Buyer’s Credit

How buyers have paid bills in the past is a good indicator of how timely they will make future payments. Always review the buyer’s credit prior to accepting a promise to pay. Sellers can obtain a signed authorization from the buyer to pull credit through a reporting agency, or the seller could simply ask the buyer to obtain a copy of his or her report for the seller’s review.

Tip #2 – Get a Down Payment

The more money a buyer puts down, the more “skin” they have in the deal. The greater this equity, the lower the likelihood the buyer will stop paying.

When people have little to no equity, they are more likely to default or just walk away from the home. Few sellers want the hassle of taking back a property through foreclosure, so increase the odds in your favor by requiring a down payment.

Tip #3 – Set the Terms

The terms include interest rate, payment amount, frequency, and the due date for payment in full. There are also late fees, default clauses, requirements for insurance, and other standard provisions.

While the terms can be whatever the buyer and seller agree upon, it makes sense to set terms that are affordable to the buyer AND favorable to a note investor. This way a seller is more likely to own a note that is valuable to an investor in case they ever want to sell future payments for cash.

Tip #4 – Get Help with the Documents

In addition to putting the terms in writing, the documents evidence the lien. The obligation to pay (or IOU) usually takes the form of a promissory note, which is secured by an owner mortgage or trust deed recorded in the county records. A land contract or real estate contract are also used in some states. A qualified attorney or title company familiar with local laws should prepare the closing documents.

Tip #5 – Collect Payments Like a Pro

Tracking the payments, interest, and balance is often referred to as servicing the note. In addition to collecting payments, a servicer should verify the real estate taxes and insurance are kept current. The seller can perform servicing but it is a whole lot easier to hire a third party company to handle this process.

If you are looking for the complete system for safe owner financing be sure to read our how-to manual. It includes documents, examples, terms, credit reading tips, note investor criteria, and lessons learned from 20 years of real life experience.

Here is what one satisfied reader said:

“Your product is one of my go-to programs. I am glad you took the time to put it together. I think I paid more than 10x when it first came out and I think it was worth every penny!”  Greg G – Canyon Capital

Available today in our bookstore as an instant download for just $99.97

Article written and copyrighted by Tracy Z. Rewey at www.NoteInvestor.com.

Learn Owner Financing For Profit!

Every day people contact us asking about seller financing.

Often they are interested in making money as a broker with cash flow notes.

Increasingly we find it is sellers looking to sell a property fast or buyers wanting to purchase a home without a bank loan.

But where do you turn for real answers that won’t break the bank? Read more

Top 5 Articles on Seller Financing

Owner financing was a hot topic in real estate last year and all indicators point to increased demand in 2010.

In search of alternative financing methods, Read more

Secrets of Paper Training

NoteInvestor is excited to share information on the “Secrets of Paper” live training offered by Jeff Armstrong September 18-20, 2009, in Atlanta, Georgia.  Jeff has been operating his successful one-man note brokering business for over 18 years.  We asked Jeff to provide his insights on the current market and how the live training will help note brokers and real estate investors to not only survive, but also thrive in the upcoming year.

Be sure to read his comments and statistics on the increase of seller financing. Are you ready for your share of the note business? Register Now for the Secrets of Paper 201 Training.

Secrets of Paper 201 from Jeff Armstrong

I had a note broker call me up the other day and ask me in desperation, “When is the note market going to change?” With no hesitation, I answered. “The bad news is, Read more

The Downside of Owner Financing – Disadvantages to Seller Financing

What’s old is new again and the credit crisis, struggling economy, and declining real estate market are making seller financing the come back kid of 2009.

Offering to owner finance a property can attract buyers and even save transactions as banks increasingly stamp “DECLINED” on mortgage applications.  Before you agree to “Be the Bank” carefully consider the downside to providing creative financing. Read more

Owner Financing – 10 Advantages to Using the Seller Carry Back

The word is out and seller financing is on the rise as buyers and sellers look for creative ways to finance property in the struggling market.

So what’s all the hype? Here are ten advantages to using the seller carry back to buy or sell real estate. Read more

UPDATE on HR 1728: How Congress Wants to Change Seller Financing

There is growing and legitimate concern over how Bill HR 1728 would severely restrict seller financing. Be sure to read this informative update. Read more

Using Owner Financing with the $8,000 First Time Home Buyers Tax Credit

The government is offering first time home buyers an $8,000 tax credit in an effort to stimulate the ailing real estate market.

Sellers can attract buyers by highlighting the refund in their ads, especially when used in conjunction with owner financing. Read more

Investor Spotlight: Seller Financing Mentor Program

Western Capital Investments, Inc. is offering a unique mentor program for cash flow brokers specializing in owner financed notes.  Note Investor (NI) recently interviewed Lynda E. Vaillancourt (LEV), President, to learn more about her company’s services and investment parameters. Read more

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