Owner-Financing: Seller Carryback vs. Land Contract

[Steven Skinner]

So...

I've been reading way, waaaay too much about the subject of owner-financing within too short of a time-frame over the past few days. All of the facts and technicalities are starting to run together in my head. You've got the main few: 

• Seller Carryback (All-Inclusive Mortgage, All-Inclusive Trust Deed or AITD)
• Land Contract (Contract for Deed, Contract for Sale, Installment Sale)
• Lease Option (or the alternative Lease Option, Rent-to-Own)
• Subject-To (sub2, Assumable Mortgage)
• Wraparound Mortgage (2nd Mortgage, Junior Mortgage)

The issue I'm having is this... what is the true purpose or usefulness of a Land Contract? Especially when being compared to Seller Carryback. I understand the differences, such as equitable title vs legal title, different options being available (by state) for recapturing ownership of the property following default of payments, and other jazz like that. But what's the actual point? From what I'm seeing, they're identical in that they offer the same ease of restrictions that would otherwise need to be satisfied in order to acquire regular financing (such as credit, DTI, employment history, etc). They're identical in the eyes of the IRS, in that you can write-off interest paid on either. They're identical in that they can both have their price, interest, term, amortization, and requirement (or lack thereof) for a balloon payment negotiated to no end. And they're also identical in that they both trigger the due-on-sale clause (yes, 100% they both do).

The only real distinctions I've ironed out are the following:

BUYERS: Face the huge risk that their seller could face financial or legal trouble and lose the property; or, at the very least, have a hefty lien placed against it. You also may not have access to the protection of a standard foreclosure proceeding if you briefly fall behind on your payments to the seller. Read your contract and study your state laws.

SELLERS: Have the slight benefit (maybe, if their state permits it) of avoiding a full-fledged foreclosure process. Such as here in Georgia, you can 1) go for the foreclosure, 2) sue on the contract, 3) rescind the contract and bring ejectment, or 4) rescind the contract, re-enter and re-possess, with three and four depending on whether the property is occupied or not.

It wouldn't surprise me if I was overlooking something blatantly obvious at this point, so feel free to wave the answer in my face if that's the case. I figured I'd just ask others as opposed to reading even more on the subject, lol. Let me know what you think!

Thanks in advance.

[Jerry W.]

@Steven Skinner, in my state the big difference between a CFD and a seller carry back is deficiency judgement versus loss of equity. In a seller carryback or land contract carried by the Seller,if you default they must do a full foreclosure of at least publication, and sometimes a judicial foreclosure. The property goes into the buyers name so you also must deal with statutory redemption periods, etc. You are looking at 3 months on a quick foreclosure, and well over a year on a judicial foreclosure. With a judicial foreclosure you can get a deficiency judgement if the property with the mortgage doesn't sell for as much as the remaining mortgage and costs. You do not usually get a deficiency judgement with a foreclosure by publication in my state. In a contract for deed, the title never gets into the name of the Buyer. An escrow is set up and a 3rd party holds a deed from the seller to the buyer and from the buyer to the seller. A memorandum of the sale is filed at the courthouse setting out the sale is pending, and is legal notice that clouds the title to prevent a new mortgage or a lien getting ahead of the buyer. The escrow agent receives the money and keeps track of when and how much is paid. If the buyer defaults, and proper notice is sent and the buyer does not cure the default, the escrow agent closes the escrow and gives the deeds to the seller who files the deed from the buyer to him and becomes the owner free and clear as the deed cancels out the memorandum of the sale. The seller cannot get a deficiency judgement and the value of the property is immaterial. If buyer owes more than it is worth oh well, if buyer has $100K of equity oh well, he loses it. Closing out a CFD is fast and cheap when it works. I have litigated a few of these and our state enforces CFDs as written last I knew. Now they do not always work. Sometimes the Buyer challenges the escrow agent or even sues them so they interplead the documents to the court, and litigation commences. it is still much faster than foreclosure. There is concern that the Dodd/Frank act may make these illegal in many instances, it is not entirely clear I hear. This is a brief background and there are many other parts but hopefully this gives the big differences. CFD protects the seller, seller carry back protects mostly the Buyer. Does that help?