How can I protect the seller in a land contract?

Question

Hello everyone!  I live in Wisconsin, and going to purchase my first rental using a land contract with the seller.  I am younger, so he is wanting one of my parent to co-sign on the land contract.  What I don't like about that, is that it will effect their DTI ratio, correct?  Are there any other suggestions on how I could give the seller some additional security in this land contract, and not worry about having to go through the foreclosure process.  Thank you!!

Peter Falk · Answer

Also, in my experience, land contracts are for a higher than market rate, and usually sellers only want to hold the note for 5 or 10 years (don't want to be the bank for up to 30 years) and just want to give a buyer time to get lined up for typical bank financing.  If you are confident in following the land contract terms, it should work (my parents bought one of their WI homes on land contract), but would always be watching for bank financing and if better terms can be had, can get a loan that would pay off the land contract balance.

Marcus Auerbach · Answer

I would be very careful with a Wisconsin Land Contract, as it is very much in favor of the seller. If you miss a payment, even if it is the very last one, the property goes back to the seller within 14 days with no recourse. You have lost everything. I would much rather do a lease with option to purchase, both are WB documents you have access to!

Ryan Seib · Answer

Good afternoon, I believe in land contracts in some cases. Even with strict foreclosure, the seller can only implement that if you do not pay or something. It is a contract and cannot be broken otherwise. By the way strict foreclosure is not based on statute. It is caselaw (ie the courts made it see Kallenbach v. Lake Publications Inc.). Thus, it is not as clean as it sounds. Judges may or may not just give the property back without accounting for your personal time and investment into the property.

That said most people in my experience using land contracts are inter family transfers. Another good option is to have the seller hold a regular Purchase Money Mortgage. Then they are the bank instead of a land contract vendor.

Neither land contracts nor a regular mortgage should affect a co-signer's ratios, if they are private loans. Although if they get reported to the credit agencies they would I believe.

Additional security may come in the form of a lien on other real property you or your co-borrowers own. Or, it could be a strong enough promissory note or interest rate that the seller is making enough money to justify the risk.

Congratulations on working on the first deal.

Jeremy Trad · Answer

@Garrett Jennings@Marcus Auerbach correctly pointed out the issues with Land Contracts and Strict Foreclosure, however, I prefer to do a Seller Held Mortgage rather than a Lease Option. Strict foreclosure is terrible and there is a zero chance I would ever personally sign a document like that. As for Lease Options, the issue I have with that strategy applies to land contracts as well, which is that the seller retains the Title in both instances. Probably doesn't make a huge difference, but I want the Title in my name when I close.I can give you the name of the attorney that drafted my Seller held mortgages if you would like. Shoot me a DM if interested.

How can I protect the seller in a land contract?

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