I'm the buyer, how do I protect myself with owner financed deal?

Question

I'm still new to this, but I know owner financing can be a beautiful thing.  I found an "ugly house" with a highly motivated seller.  She's willing to sell for $59,000, downpayment $20,000 0%apr with payments of $650 x 60months.  Sounds great!!!  I've already had a contractor over to look at the place and it will need $50,000 in work, but will ARV around $140,000 and is a duplex in a desirable area with good rents that will cover.  FYI--I'm an out of state investor.

SO.... I've corresponded via text and email with the seller (she's also out-of-state for the property) and we've reached our terms.  She mentioned that she would do a LAND CONTRACT for the term and it will be filed with the county.  I've reached out to a local real estate lawyer and my contractor has also done these deals--so I have some great resources, but want to pose some questions to the hive mind here as well:

1.) I've never met this person, I know her name and it matches to the name on the title via a county title search.  Is there a way to ensure she is who she says she is and has the right to sell the property?

2.) I've reached out to the title company and will get a title search--will this also disclose any liens on the property?

3.) With a land contract, am I taking a risk?  I will be heavily invested in this property and the improvements--I don't want to lose it.

4.) Can I take out a mortgage/refi the property before the term is up on the owner financing and pay her off?  I'd like to BRRR this one and don't want to wait 5 years for my investment.

5.) What other questions should I be asking or aware of?

Thank you all!  As I said, I have an appointment to speak with an attorney, but I want to have my ducks in a row before I go in there--they charge by the minute :)

Erik W. · Answer

@Ashleigh T Lambert,

To add on to the risks Tyler mentioned....if the Owner retains title, there are a host of other issues that could 'cloud' the title between now and when you fulfill your end of the bargain.  Let's say the owner or owner's kid gets sued for causing an accident.  The winning attorney will search for assets and find the house YOU are paying on and can slap a lien on it, making it impossible for the Seller to deliver clear title.  Then you'd have to sue the Seller to get your money back, most of which would probably have been spent defending a law suit and/or seized via bank account levy to satisfy the judgment.  Also, if the owner stops paying taxes and the county auctions it at tax sale, you would be responsible to satisfy that or lose your interest in the property along with all funds you poured into the rehab.

How do you protect yourself?  GET TITLE in your name.  Do NOT do Land Contracts unless they are extremely short and you can afford to lose the money.

How do you know that she has title and is who she says she is?  The closing attorney/title company should verify ID and have her sign affidavits that she is the legal owner.  By delivering a Warranty Deed at closing, she would be promising to defend your title, and the Title Insurance company will also require that her ID is verified and ensure title is clear before issuing an owner's policy.

Can you take out a loan on it before paying off a land contract?  No lender with an ounce of common sense will loan on a property you don't own.

My advice is find a way to buy it outright, without the Land Contract.  Too much risk.

Tyler Gibson · Answer

@Ashleigh T Lambert did you discuss with the attorney that you would be using a land contract? I believe that with a land contract the owner retains title to the property until you pay off the loan. This means that they could go out and borrow against it. This creates risk because if they take out loans and never repay it could fall into foreclosure. This also means that if the title is not in your name you could not mortgage/refi.  I would want to do a deed of trust or simply record a mortgage and a warranty deed. I may be wrong but I believe that the title would nor convey until you make the final payment which does create risk for you and none for the property owner.

Joe Villeneuve · Answer

Way, way, WAY too much cash tied up...for 5 years (actually for 5 minutes).  You're putting almost 50% in cash...as in out of pocket...as in "this is what it will cost you".  What does "good rents that will cover" mean?  If it only covers the LC payments, then you are far, far, FAR behind for 5 years.

You make no mention of cash flow while you're renting this property out, just that the rents "cover " it (whatever that means here).  If "covers" means you're breaking even, then you're actually $59,000 behind for 5 years...and you will have tied up (as in spent), $59,000 for 5 years to make a potential profit of only $30k +/- over that same 5 year period.  For me, that's a poor use of your funds (cash).  That, and the fact for those 5 years, you cash ($59k worth) is dead and buried in this house (not working like it should be doing), makes this a highly questionable deal...at best.

Ashleigh T Lambert · Answer

Thank you all for your responses.  Definitely echoes the hesitations I was having.  So, I went back to the seller and told her I would like to take possession of the title and have her as a lien holder or, I could go with traditional financing.  She said that either option was fine with her--so, I haven't lost the deal and will get to put less money down and have control of the property from day one!

Steve Vaughan · Answer

Good on you getting a thorough title search.  This will disclose all owners and recorded encumbrances.  Check with the city/ county that there aren't any open permits or utility balances owning as well.

Yes, with a Land Contract you are taking a risk.  You will own nothing during the payment period.

Hard to refi what you don't own.  I've seen LC buyers have to get a purchase loan even though they've been paying the seller for years.

Either way, insist on a note and mortgage/deed of trust.  You will at least own it.

Greg Scott · Answer

Are you unable to qualify for a loan?

In this situation, owner financing is hurting your returns.   By the time you are done rehabbing you will have over $70K tied up.  Your RoE is not good and you have a wad of cash tied up for months and months.

A much better approach would be to buy it straight-up using a hard money lender and rate & term refi as soon as tenants are in place.  Based on your numbers, you can probably do that for only $15K out of pocket, generating amazing RoE.

Wayne Brooks · Answer

I’d never buy on a land contract, too many things can happen....owner gets judgments, liens, etc attached to the property,etc.  Either you get title and she gets a note and mtg/trust deed.....or no deal.

Selling by land contract and buying sub2 are fine.....buying on land contract and selling by sub2 are for suckers.

Wayne Brooks · Answer

I’d never buy on a land contract, too many things can happen....owner gets judgments, liens, etc attached to the property,etc.  Either you get title and she gets a note and mtg/trust deed.....or no deal.

Selling by land contract and buying sub2 are fine.....buying on land contract and selling by sub2 are for suckers.

Caleb Heimsoth · Answer

@Ashleigh T Lambert I wouldn’t do this deal because you’re out of state and that’s a major rehab.

Do you have a lot of rehab experience? If not this sounds like a great way to lose a lot of money

I'm the buyer, how do I protect myself with owner financed deal?

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