Land Contracts

[Luanne Dvorak]

Hello,

Was wondering if there is a better option for purchasing a free and clear property from a seller. He is suggesting a land contract. I pay taxes and insurance and he holds the deed. Balloon payment in 5 years. 4.5% interest. Amortized for 20 yrs. I was going to do this out of my IRA. Any suggestions or thoughts on this?

Luanne Dvorak

[Bill Gulley]

BUZZZZZZ, sorry Darrin, wrong answer, LOL

Seller financed mortgages, equity financed notes are installment purchases, tax is due as the percentage of principal received to the gain. Same with a CFD. Your sale price is 100%, your basis 80%, your gain is 20%, therefore 20% of the payment goes to the gain and is taxable.

Some state have specific statutes to govern land contracts, TX outlaws them, LA uses another version,  OH allows them. However, just because they are allowed doesn't mean you should.

You really need to have these contracts serviced by a loan servicer, lots of ways for a seller to scam a buyer in a CFD, like throwing a payment check in the trash, you don't know it didn't clear until your next statement is received along with the demand to pay in full from the seller.

The deeds can be challenged as well, deeds are effective when made, not filed, the filing perfects the interest as public notice, but ownership or quit claiming back may be accomplished upon making the deed.

Title companies have issues because of the newer outlook on deed transfers, check with your title company.

The requirement to foreclose from the federal side as to installment sales is 10%, the IRS will look at the 10% mark as an installment sale in other arrangements.

Regardless of equity established, a borrower can push for a judicial foreclosure arising from a CFD, such statutes are stated as at a certain amount you must, not that at a lower amount you can't go to foreclosure which is usually best anyway. Circumventing foreclosure laws leads to other issues.

If a seller just files a QCDeed for default they are circumventing FC laws, a borrower could have improved a property taking their equity in excess of your stated amounts, don't forget appreciation that goes to the borrower or buyer.

Often, if there is a loan under the CFD, the due on sale applies and a seller may require separate insurance to avoid notices of the sale to the lender, in such case, your paying for two policies and you can have a mess for claims as the insurance companies will want rights of subrogation. Next insurance issue is cutting checks for losses to the seller.

In many areas, contractors won't contract with someone who is not in title as they don't have the authority to bind the contract allowing the contractor to file liens if necessary.

Same goes with municipalities, say you need a building permit, it is issued to the folks in title or as authorized by them to the contractor.

Taxes, they can be paid by anyone, tax credits go to an owner.

Bankruptcy and law suits, your seller holds the asset, his assets are at risk, and the terms of your sale may 1. be ignored treating you, the buyer as a creditor as if your contract equity were a lien or 2, force sale or 3. if the buyer has most of the equity they may ignore the seller's remaining equity and allow the sale to continue and lastly, the note is an asset it could be liquidated, I said lastly, I'm sure installment sales can cause other issues.....like in a divorce by the seller. Those are good refi opportunities for a lower payoff too.

The buyers financial statement, in some business transactions equity in installment sale purchases may not be counted, you don't own it  yet.

You as a buyer can't tap the equity acquired with a second, you'll need to payoff the contract with a higher loan amount, that can drive the costs of getting equity out.

You can't pledge your equity as additional collateral, you're not in title but a seller could.

There are also issues with agreeing to any deed in lieu of foreclosure, I'll post a link later.

In some cases, either the buyer or seller can create other liens on the property, like a tax lien, these can usually be worked out at a sale or refi, depending on who is on the hook for what and why, but it's another PITA to deal with.

If the seller is ever in need of cash, a note is more marketable than any CFD, the seller can get a much better price. This can be important if you have an older seller and they ever have to qualify for medical benefits.

No, CFDs and mortgages with the deed being conveyed are not at all the same.

I suggest you do a note and deed of trust, it's much cleaner for both parties. If there is an underlying mortgage then do a subject-to transaction and take title. Use a loan servicer!

If a seller is uneasy thinking a CFD is easy for them, educate them (careful, if you know more than they do in some deals they won't sell to you, good indication of a scammer, BTW) you can agree in the note to higher initial payments to acquire more equity giving the seller enough to pay for those foreclosure costs that are never going to happen.

I have bought and sold on CFDs in the past, not the way to do things today, get the deed!

Here's a link on deeds.

http://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting