Seller Financing Deal

[James Jacobs]

Who should I contact for help in structuring a seller financed deal? 

Situation: I am the buyer. The seller (two brothers as a partnership) has a mortgage on the property and let's assume they only have 20% equity in the property.  

Let's assume that the sale price is $165,000. I'll give the sellers some cash (maybe $15,000), I take over payments and structure an agreed payment to them, and I take over the property as if it is my own (property management, rehab, etc.). 

Who do I contact to make sure that I am protected as the buyer and that the seller doesn't walk away and sell it to someone else or something like that? An attorney? A title company? 

Do you have creative ideas that you have done in your seller-financed deals? 

Also, are there any other things I should look out for or make sure I negotiate as part of the deal? 

[Brian Gibbons]

@James Jacobs

Hi @Steve Vaughan , thanks for the shout out!

James, 

With an underlying loan in place, what is customary in MI to sell on terms is a land contract that is fair to all parties.

What is a Land Contract?

A land contract is an agreement between a buyer and a seller that states the buyer is purchasing property but will not receive the legal title until the debt has been satisfied. Land contracts are a form of seller financing and are typically used in real estate transactions , usually residential, when a buyer cannot secure traditional means of financing.

Unlike a mortgage, a land contract stipulates that if a buyer does not fulfill his financial obligations in the agreed upon terms of the contract, then the seller regains possession of the property and keeps whatever money the buyer has remitted.

Land contracts are legal and binding in Michigan and must be in writing in order to be enforced.

Enforcement is governed by Michigan law and falls under the general category of contract law.

If any party involved in the land contract transaction does not meet the terms of the contract anytime during the term of the agreement, the contract is rendered invalid due to breach of contract rules.

What Distinguishes Land Contracts in Michigan?

There are some basic principles that distinguish Michigan land contracts from purchase agreements and/or land contracts used in other states.

In many respects, Michigan land contracts are more like a mortgage than a purchase contract. This is because they typically grant purchasers immediate possession and control of the property. Under a typical Michigan land contract, purchasers also immediately obtain Equitable title while Legal title remains with the seller. It should be noted, however, that there is very little difference between holding Equitable title to the property and holding Legal title to the property since under Equitable title, the property can be bought, sold, insured, recorded, and encumbered and can be the subject of tax liens and foreclosure.

Why Would Someone Choose to Sell Real Estate Using a Land Contract?

There are several reasons someone might choose to sell real estate using a land contract.

Here are just a few of the most popular:

A land contract may make the property easier to sell. Since the seller is the qualifying agent and controls the stipulations of the contract, the seller may set their own requirements for the credit worthiness of the buyer, the amount of the down payment or any other item that might typically be dictated by a bank or some other 3rd party. And, because the seller is setting the terms and conditions, they can establish payments that fit within the buyers budget and utilize the option of accelerating the loan through a balloon payment at some future date.

There are tax advantages using the installment sale method, as well. Taxes from the sale of a property are usually computed on an income - minus - basis method.

With an installment sale, the taxable income can be spread out over a number of years instead of taken in the year of the sale.

In other words, you can avoid paying all the capital gains tax at once.

The seller on a land contract can enjoy a regular cash flow without the headaches of managing rental property.

The seller may be able to realize a greater overall profit from the sale by earning interest. The seller may charge interest up to 11%. (And, in some cases an even higher rate of interest.)  you do need to understand the new Dodd Frank Law and the SAFE Act as it applies to Michigan.

Some Land Contract Terms You Should Know:

Balloon Payment

An unusually large payment due at the end of a mortgage or loan. Since the payments are not spread out, this large sum is the final repayment to the lender. Holding back most of a debt and paying it only towards the end of the agreement makes both those last payments and the total amount repaid much larger. The name comes from the fact that the debt becomes inflated like a balloon as a result of the compound interest accumulating on the large sum.

Due on Sale Clause – A clause in a loan or promissory note that stipulates that the full balance may be called due upon sale or transfer of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance.

Equitable Title - The right to obtain full ownership of property, where another maintains legal title to the property.

Full Legal Title - The actual ownership of the property. When a contract for the sale of land is executed, equitable title passes to the buyer. When the conditions on the sale contract have been met, legal title passes to the buyer in what is known as closing . Legal and equitable title also arises in trust.

Quiet Title – An action to quiet title is a lawsuit brought in a court having jurisdiction over land disputes, in order to establish a party's title to real property against anyone and everyone, and thus "quiet" any challenges or claims to the title. This legal action is "brought to remove a cloud on the title" so that plaintiff may forever be free of claims against the property.

Vendor – Term used for the seller

Vendee – Term used for the buyer

Warranty Deed - A type of deed where the grantor (seller) guarantees that he or she holds clear title to a piece of real estate and has a right to sell it to the grantee(buyer). The guarantee is not limited to the time the grantor owned the property—it extends back to the property's origins.

I hope this helps.

Best wishes,

Brian