What the heck is a land contract and how do you use it?

Question

hey bpers,

What is going on with these land contracts?

What are they?

How do you use them for buying or selling?

Do you have any case examples?

Thanks in advance!

Jay Hinrichs · Answer

@Jon Holdman

Jon great synopsis its definatly state specific.. Many gurus touted them a few years back. In Oregon if you have a land contract that is recorded or not.. The courts of Oregon will make you go through a Judicial foreclosure to remedy a default so for sellers these are terrible in this state. But they were predominantly used in land deals not many for homes until it became popular through the guru circuit. If one is not recorded and the person losing the house walks away there is no big issue.  I took over a bunch of these from a young group of investors here in Portland that got their selves in a wringer listening to this particular model.. buy subject too with little or no down.. then sell on contract ( and they recorded them) with little down and make the spread. Kind of like a wrap mortgage.. Well they buggered up all the titles. and of course the low down easy qual owner occ lasted on average 16 months before they defaulted.. Original owner is not getting their payment because the investor is not getting paid.. and you had a cloud on title .. Big mess for sure.

In my mind its better to just use a deed of trust.. in most markets you can get through the forclsoure process in 6 months  or so. I did a few in GA in 90 days on loans I made there... Or use a lease option.

Jon Holdman · Answer

A land contract is the way you buy cars with a loan.  When you buy a car with a loan the lender holds the title to the car.  Once you've paid off the loan, they give you the title.

With a normal real estate purchase, the buyer owns the house once the closing is completed.  When they get the loan, they give the lender a security interest (a mortgage or deed of trust) in the property.  But the owner still owns it.

With a land contract, the lender (typically the seller) retains ownership of the property.  The borrower has a contract with the lender.  That contract usually gives them possession of the property, but not ownership.  Once the contract is fulfilled, the lender transfers ownership to the buyer.

Its typically used as a form of owner financing.  On the scale of possibilities, its in the middle.  A lease/option gives the tenant/buyer very little control and the landlord/seller has a lot.  With a seller carried mortgage, the buyer has a lot of control and the seller very little.  A land contract is in between.  The details of how a land contract works varies by the state.  So seek legal advice in your state before engaging in one.

Brian Gibbons · Answer

Hi @Matt Rosas

I live in Sherman Oaks too.

Contract for Sale is closest in Calif to a Land Contract, and it is an Installment Sale.

A Home Owner with the Dodd Frank can sell on terms.  I responded to that today in fact.

http://www.biggerpockets.com/forums/311/topics/115369-price-reduction-strategy---help-please

The ability to foreclose and get the property back in Calif is arduous, so I would see a local Calif RE Attorney.

See

https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=4-113+California+Real+Estate+Law+%26+Practice+113.syn&srctype=smi&srcid=2982&key=39ea43bc2ea4bd533296e1d90704e23c

Jon Holdman · Answer

No, I've never used one.  Well, I guess I sort of did in a deal with my mother in law.  But it was very informal, only for a couple of years, and has been completed now.  When I first looked at buying a house in the mid 80's in Texas these were discussed.  I did end up buying with seller financing, but it was a straight mortgage on a free and clear house.

It seems like the biggest issue here is dealing with default.  With a lease/option they've violated the lease and you evict.  With a mortgage you have to foreclose.  Land contracts seem to vary by state.

If you have an underlying mortgage, selling with a seller-carried mortgage (warp or all inclusive trust deed), subject to, land contract, option or a lease longer than three years all probably violate the due on sale clause.  At least, the standard verbiage covers all those situations.  So, none of these help you avoid the due on sale.

Jeff Rabinowitz · Answer

Land contracts are common in Michigan.  Yes, I have sold property this way.  For my transaction, I as seller executed a deed transfer (warranty deed) which was held in escrow to be released upon the buyer's successful completion of the terms of the contract.  The buyer made all payments due and the escrow company released the deed to them.  In my case, the buyer died and it was the buyer's estate which paid the remaining balance on the land contract in order to sell the property and capture the equity.

Aaron Yates · Answer

Matt R. , what EVERYONE here is forgetting to mention is that EVERY transaction regarding seller finance has come under new nationwide laws in January of 2014 called the Dodd-Frank act almost make it illegal for a normal person to sell on ANY type of seller-finance deal.

Seller finance deals was a way for people with less than desired credit to still become a home owner. But what happened was MANY property owners sold this way but didn't pay the mortgage and/or the taxes. Then 3 years later the buyer was out of a place to live while the owner banked the 3 years of payments and had no remorse.

You may POSSIBLY now get away with 1 a year as an investor and are fine to do your primary residence. Anything other than that and you better seek legal advice and hire a licensed broker or become one to handle the deal. Even then, after so many you STILL could get into some trouble.

Just food for thought since no one here seems to be willing to give you this advice.

Matt R. · Answer

Yes Aaron, thanks.

Matt R. · Answer

Personally, I don't see myself using. I like my business model more cut and dry but I wanted to know what the frick was going on.

Thanks,

Matt

Matt R. · Answer

thanks Jon, brilliant! Now I understand what they are and how they work.

Have you ever used them?

Thanks again!

What the heck is a land contract and how do you use it?

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