12 Days Of Note Investing/Day #8 Contract For Deed -Land Contract

[Tracy Z. Rewey]

While a note and mortgage or deed of trust are the most common real estate financing documents, sometimes seller financing utilizes a Real Estate Contract, Land Contract or Contract For Deed.

The seller agreed to accept owner financing on a 20-acre land parcel in Iowa. The sales price was $50,000 with a $5,000 down payment made by the buyers at closing. The balance of $45,000 was carried back by the seller at the rate of 8% interest per annum with monthly payments of $377.00 for the next 240 months.

After receiving 6 monthly payments the seller was interested in receiving cash now for the remaining payments. The buyer had started building a home so the property now included water, electric, septic, foundation, and framing. These improvements increased the value and served as additional collateral should there ever be a default. The seller accepted an offer of $30,000 for the investor’s full purchase of the remaining 234 monthly payments.

When the seller originally sold the property to the buyer they utilized a Real Estate Contract. The seller remains vested in fee simple title until the buyer has made all contract payments in full. Once the seller receives the full principal balance plus interest, a warranty deed is delivered from the seller to the buyer transferring fee simple title into the buyer’s name.

With a mortgage or deed of trust the seller transfers the fee simple title to the buyer upfront at the time of closing (rather than at the end with a contract). The buyer then gives a lien back to the seller as evidenced by a note and mortgage or note and deed of trust.

Since the seller remains vested in title until payment in full on the Real Estate Contract, an investor would take on these same responsibilities. An investor must be certain the seller is holding clear title in order to accept the deed from the seller and hold it in trust until the buyer has paid in full. The investor also receives an owner’s policy rather than a mortgagee’s title policy from the title company upon purchasing the payments from the seller. In some states a Contract For Deed is common while in other states they are prohibited so be sure to discuss with a title company and/or attorney that knows the laws in your state.