Is there a market for land contract?

[Account Closed]

I am a wholesaler in Tampa, FL. In my marketing I got a lead that is a land contact. It's a mobile home in about 1/2 acre of land in Marion, Ohio which is apparently about 30 minutes from Columbus, OH. The owner owns the land and the mobile home. Anyhow until recently I didn't know what a land contract was and I'm still a little unsure. When the owner explained it to me it all sounds to me like a note or a promissory note. Which he wants to do is liquidate for cash. It is apparently worth about 50k and it has about 8 years left. Is there such a market for this? Has anyone ever bought or sold a land contact before? Can someone in Ohio enlighten me? I'm willing to JV on this if need be, just help!

[Dion DePaoli]

Land Contracts, Contract for Deeds or Bonds for Deeds (all referencing the same type of instrument) are installment sales contracts.  

These are antiquated instruments and not favorably looked upon by the majority of the industry.  The general reason is exactly what happened in this thread - they are grossly misunderstood and then get abused.  

The contract requires periodic payments over a term and upon completion title vests in the name of the buyer/borrower of the real property.  The misnomer is that those payments are not the buyer/borrower earning equity in the subject property but rather more like a rental payment which only serves to grant possession and not other rights and interests in the real property itself.  Like a renter.  

The problem is, that is an incorrect application of the general view on those instruments.  The reason is often cited from judges ruling on the enforcement of those instruments has to do with recognizing that the buyer/borrower is actually earning equity and is granted a greater level of interest in the real property than that of a typical renter.   In general this can be understood when looking at the instruments that require the buyer/borrower to take full liability of the property but not enjoy the benefits of being the owner, so no tax write offs.  Judges across the nation recognize that is an unfair treatment of the buyer/borrower.  

In each state you will laws dealing with real estate installment contracts.  Many have been a topic of debate over the last couple years due to an increase in the use of these instruments.  The important idea there is understand what works in one state may not work in another.  

The major misunderstanding and likely the key driving the utility of these instruments is notion of ease of eviction. The moral of the story is it not anywhere close to being simple eviction across the board. A renter can be evicted and does not require a redemption opportunity since the renter is not looked onto as earning equity in the real property through their periodic payments. A renter is also protected from an owner who tries to pass property liability on to them. The buyer/borrower in a LC/CFD is recognized to be earning equity with each payment and liability is passed making them more of the actual owner and less of a renter with no equity.

The notion that the buyer/borrower in an installment contract earns equity also means that they have an equity of redemption.  In other words, they must be given a right to redeem any contract breach which places the contract into default.  In other words, the process of terminating the contract is NOT simply eviction.

The incorrect understanding of these instruments often leads to their abuse.  Real estate installment contracts are sometimes referred to as "the poor man's mortgage".  That holds very, very true in today's market.  First any buyer who can will get a mortgage conventionally since that represents the best terms for debt.  Thus installment contracts typically involve folks who are less credit worthy.  This means innately there is a dash of predatory dealings in many contracts.  

Often times we see low down payments and inadequate underwriting which means lower income borrowers and borrowers who do not possess the means to support owning the property including on-going maintenance and other liabilities.  

The other looming issue is they often trade wrong. An investor does not purchase the installment contract on its own. He/she cannot, they will eventually be in breach of contract since the contract requires transfer of title to the buyer upon payment in full. So a buyer of contract for deeds or land contracts is actually a buyer of real property. The transaction is exactly like buying a rental property with a tenant and not like a mortgage or deed of trust transaction which are sold as standalong instruments with their secured notes.

I have also seen where many, many (too many) folks refer to these instruments as "Notes". Interested investors get involed thinking they are buying a securitiy instrument with a note attached and thus leading to improper trades and misunderstandings across the board. This also seems to draw in brokers from all over the place who try and middle these trades to investors further clouding title. If you get one and the borrower/buyer pays off the contract you better be able to convey title or they can sue you for the whole contract plus damages for lack of performance. This is further exaggerated by those transactions which do involve transfering the real property to the interim investor is often done with no deed warranty. In otherwords, many simply Quit Claim the property to the new investor. This also means the interim investor has to defend any prior claims on their own since they did not recieve a warranty deed from their seller. Claims can come from other investors along with other previous buyer/tenants depending on what has happened with the real property leading up to the contract in place now.

As I said at the begining, these contracts are not favorablly looked upon by the industry as a whole. ANYONE telling you otherwise is simiply lying to you. Many judges, attornies and other industry proffessionals have spoken out against these instruments calling them antiquated instruments. The instruments are often not used properly and misunderstood by both parties. There is no real benefit to using an installment contract over the standard security instruments such as mortgage or deed of trust.

Can real estate installment contracts be setup properly and used correctly? Yes. Unfortunately the norm is exactly the opposite. New investors be warned that you may be getting into something that misunderstand grossly and often times this lesson can come with a dollar sign attached.

There are many threads on this topic here.  Search for them for more information.

Carpe Diem.