Do you invest in Land Contracts? Why or Why Not
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
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Do you invest in Land Contracts? Why or Why Not
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Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
7yI I personally do not invest in land contracts nor does either of the funds that I run. The bottom line reason is that as a land contract holder you are the owner of the property and responsible at the end of the day for any liabilities on that property.
Our business model is to become the bank and hold paper -- not own assets and essentially become glorified landlords with a borrower who may or may not pay off the contract while in the meantime who may or may not create more liabilities for myself or my companies.
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- Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes7y
Originally posted by @Guillermo Perez Vargas:
Guess I did not explain it well enough. The Trust is not for asset protection, however the overall structure of Trust and LLC mitigates the down side (not just the risks). In my mind, risk involves possible loss of principal, down-side involves the hassle of work that I will need to do to to protect investment. Foreclosure is a downside if the LTV is adequate, inadequate LTV is a risk. I selected this structure after reading about it BP and Paper Source, and also being mentioned by multiple "gurus", and since it made sense to me, It seemed as the best way to structure the ownership of my Notes.
Having the CFD in the name of a trust with beneficiary being a LLC, allows for a more efficient process to take back the property if Borrower is unwilling to correct the issue (the 20% rule not withstanding). Additionally, it is my understanding that some states require that property in that state, held by an LLC, require the LLC be in that state. With title being in the name of the Trust, this is not an issue. Finally sale of the Note, is much simpler if in a trust. No need for Title Company. And yes, I also like the idea of my name not being easily discovered as the owner of the note.
The issues you mentioned about CFD being more work because Borrowers are not as financially strong, I totally agree. However the issue is the qualification of the borrower, not the CFD structure itself. A trust-deed with a marginal borrower can also be a problem, and the foreclosure solution is more time consuming and costly. The issue of fines by county, are definitely an issue inherent to CFD's. All my notes are in Michigan, and I'm listed in the county records as either the "Lender" or "Title Holder" depending of the county, but in any case I get notifications of any issues, and can make sure borrower corrects the issue.
As I mentioned initially, I'm relatively new to this. I bought my first note in Mid 2018, and definitely have much still to learn, so I really appreciate it when the people with more experience correct any errors I may post. Thank you! :-)
I won't comment regarding this method in any other jurisdiction, but in Texas and related federal courts, if the trust is used to bypass the typical foreclosure process, then courts will ignore your structure and analyze the facts to see if you complied with the foreclosure statutes.
Courts won't let you use tricks to bypass the law.
- Investor · Scottsdale, AZ · Member since 2009 · 23 posts · 5 votes7y
I'm not sure of the legal standing of this in Texas since all the Notes i have are in Michigan. Don Konipol gets into more detail regarding this in Texas in a post on this thread.
The issue is that in a land contract, the property is titled in the name of the trust (or lender), only after all the terms of the contract (payments) are completed, does the property title transfer to the borrower. During the time the payments are being made, the borrower is treated more like a tenant than an owner, as such, if the borrower does not comply with the payments, it becomes an eviction NOT a foreclosure. This is not a "trick", it is a fundamental difference between a mortgage, or warranty deed, and a land contract. In some states recently, courts have ruled that as payments are being made by borrower, he acquires some additional rights and at some point, when the borrower has acquired a varying amount of equity in the property - usually in the 20% range - he/she is to be treated as owner and then the eviction has to be done through a foreclosure, but until such time (it is different in different States) , the borrower is legally considered a tenant.
Finally, I must say, I'm not a lawyer, but i do try to understand carefully the legal issues applicable to the Notes I acquire. It is quite possible that I missed something relevant. I'm just answering the original question on this post as to why I like the land contract format. :-)
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