Land Contract, ideal for first time investor or idiotic?

Question

Good morning everyone in the BP community!

My questions today are about land contract and their interest rates.

If I have a finiancier that happens to be a family member that is willing to pay everything up front for a property and then will sign a land contract with me to take ownership of the property in a few years, what do you guys think?

What's the average land contract rate, what's a good rate, what might be a bad rate?

Is this a good way to finace a deal if I am still in college and am not working full time yet and only have enough for a downpayment? Is there anything I should be wary of?

Is getting into business with family a little dicey?

Any information is welcome and appreciated!

Nathan Coleman · Answer

I was a farm loan officer for several years and saw a lot of land contracts. It's a popular way for family to transfer farmland or homesteads to the next generation without involving a bank.There are two ways to go about it. First, a true land contract stipulates the deed is in the owners name until full payment is obtained, then the deed transfers to the buyer. This could be years down the road.Second, the deed transfers and the seller retains a mortgage on the property. Owner financing.I tend to prefer the second as that mortgage can be more easily refinanced if the seller dies and you're fighting with the wife / estate, the relationship goes south, or whatever. The exit is much cleaner.As a side note, one of the smartest estate planning gimmicks I ran across involved an owner held mortgage for a farm. Mom held the note to the son, and the payments just happened to be the exact amount that Mom could legally gift to the son each year.

Nathan Coleman · Answer

I'm assuming he would be the owner of the property at the time he owner finances it to you, with or without debt, the deed would be in the sellers name at the time of the transfer to the new buyer.Centerville is between here and there, on the outskirts of nowhere. Blink and you'll miss it, but it is very nice this time of year.

Ethen Weaver · Answer

@George Despotopoulos thank you very much for all the information you have given, it has all been really helpful!

George Despotopoulos · Answer

@Ethen Weaver the extent of my experience/involvement with a land contract is when I was a private attorney and represented a party involved in one. I would just say to have an attorney draft it for you and make sure you and your family member are on the same page with everything, especially the payment obligations and what happens if you're late or default.

Ethen Weaver · Answer

@Nathan Coleman So in the latter scenario when you say "the deed transfers and the seller retains a mortgage on the property." Are you saying that the deed transfers to the buyer (my financier) or directly to me and then he has the mortgage in his name?Also, where exactly is Centerville, TN? Gorgeous this time of year??

Ethen Weaver · Answer

@Brett K. thanks again for your advice! I really do appreciate it. How's the weather down in Louisville this time of year?

Brett K. · Answer

Ethan, it sounds like this will be a great fit for you. Your financier is well connected and this isn't a substantial risk assuming you go after a moderately priced property. And you are already connected to the RE industry! I haven't used a land contract. I was a mortgage broker more than a decade ago and I paid several of them off with new financing. I got to see them up close. By the time they I saw them they has worked well for the buyer and seller.

Ethen Weaver · Answer

@Brett K. Thank you for your input! I really appreciate hearing that others are interested in my endeavors!He is a very successful business owner and I know he is financially knowledgable, plus he knows so many people in virtually every industry.As you mentioned it is a great opportunity and I intend on sitting down with him and running the numbers.Also, have you ever used a land contract in any sense? If so, how did it work out for you?Regards,Ethen

Ethen Weaver · Answer

@George Despotopoulos I am still extremely green, I work in the construction industry and also in the office of a local realtor so I have my foot in the industry door but I have yet to make my first deal. Have you ever used or issued a land contract? If so, how was you experience?

George Despotopoulos · Answer

Land contracts can definitely get messy. There's personal involvement, especially with family, and sometimes that makes it a lot worse if things on the project don't go as planned. There are no standard terms, especially when they're giving you 100% financing. That's not really normal in the lending space. We would need to know the loan amount, what the project is, and if you have any experience and what it is.