Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
I'll be brief to start. I may start a new thread with more details, but hopefully the mods will work with me :) .
I'm in commercial and residential REI. Looking to expand my commercial side on this deal.
It's a raw land purchase, where I would buy and develop.
Owner is retired, out of state, decided to sell rather than hold. I could buy the land but it would take me a couple years to pull money from other holdings to continue the development, so here's my idea.
They give me the property on a land contract. I have the right to develop. I pay them X (~$25k/year) for 5 years, or longer, with a balloon payment at the end of our contract.
I am able to build my business on the property. They get to avoid the higher tax rate because they are collecting smaller chunks of cash per year, rather than the entire amount at once.
The land is a little under 200k. Development will end up being an easy 500k over the next 4 years.
I think my main concern is that I haven't done a land contract on commercial property, and I'll be sticking quite a bit of cash into developing the property before we actually complete the deal... and I don't want to risk losing my time and money over something stupid.
So... any of you have experience with Land Contract commercial deals?
It would change his tax bracket and he also expressed interest in distributing the income over several years rather than taking it all at once.
Why not buy with a mortgage? Because I have to put down 20% of anything I borrow on a commercial property, and a land contract would defer a significant amount of my capital, which I want to use to build income property.
I understand that most banks wouldn't lend in this situation, but I have a solid history with my bank, assets to back up my request for funding on a project of the type I'm considering, and a reasonable foundation to believe that I will get the funding where the average investor would be denied.
It's my understanding that a land contract is as solid as the wording in it, so what I'm looking for here is people with experience doing deals like this.
Instead of a land contract why not just get the sellers to do a seller carry back? They're only going to get the amount you agree to for the land contract sale, but instead of you as the buyer having exposure to the risks associated with using a land contract you'll actually take title. Holding fee simple title in the property is a more desirable approach and would then also allow you to borrow against the property for its development if you can find a lender to provide construction financing.
I've bought a property using a land contract. It was a SFR I bought back in the early 90's. Nothing went wrong in that buy because the sellers were honorable folks. It wasn't until many years after that my former partner, a land use attorney, explained to me the risks buyers take in acquiring real estate through the use of a land contract. Many of the risks can be mitigated through the contract itself. However, in many instances you as the buyer may be forced to protect or recover your interests in the property through litigation.
I would still buy property using the land contract but I would also know going in with eyes wide open what my risks are in using this purchase method. Definitely not the better Purchae method if you're planning on making significant improvements to the property.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
11y
Paying the owner over time will have very little impact on his cap gain taxes. Why not just buy the property with a mortgage, as I don't believe you'd be able to mortgage the property while under a land contract anyway? Can't see putting all that money into a property that's not actually yours yet.
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
Thanks for the response, I appreciate your time.
It would change his tax bracket and he also expressed interest in distributing the income over several years rather than taking it all at once.
Why not buy with a mortgage? Because I have to put down 20% of anything I borrow on a commercial property, and a land contract would defer a significant amount of my capital, which I want to use to build income property.
I understand that most banks wouldn't lend in this situation, but I have a solid history with my bank, assets to back up my request for funding on a project of the type I'm considering, and a reasonable foundation to believe that I will get the funding where the average investor would be denied.
It's my understanding that a land contract is as solid as the wording in it, so what I'm looking for here is people with experience doing deals like this.
It would change his tax bracket and he also expressed interest in distributing the income over several years rather than taking it all at once.
Why not buy with a mortgage? Because I have to put down 20% of anything I borrow on a commercial property, and a land contract would defer a significant amount of my capital, which I want to use to build income property.
I understand that most banks wouldn't lend in this situation, but I have a solid history with my bank, assets to back up my request for funding on a project of the type I'm considering, and a reasonable foundation to believe that I will get the funding where the average investor would be denied.
It's my understanding that a land contract is as solid as the wording in it, so what I'm looking for here is people with experience doing deals like this.
Instead of a land contract why not just get the sellers to do a seller carry back? They're only going to get the amount you agree to for the land contract sale, but instead of you as the buyer having exposure to the risks associated with using a land contract you'll actually take title. Holding fee simple title in the property is a more desirable approach and would then also allow you to borrow against the property for its development if you can find a lender to provide construction financing.
I've bought a property using a land contract. It was a SFR I bought back in the early 90's. Nothing went wrong in that buy because the sellers were honorable folks. It wasn't until many years after that my former partner, a land use attorney, explained to me the risks buyers take in acquiring real estate through the use of a land contract. Many of the risks can be mitigated through the contract itself. However, in many instances you as the buyer may be forced to protect or recover your interests in the property through litigation.
I would still buy property using the land contract but I would also know going in with eyes wide open what my risks are in using this purchase method. Definitely not the better Purchae method if you're planning on making significant improvements to the property.
Instead of a land contract why not just get the sellers to do a seller carry back? They're only going to get the amount you agree to for the land contract sale, but instead of you as the buyer having exposure to the risks associated with using a land contract you'll actually take title. Holding fee simple title in the property is a more desirable approach and would then also allow you to borrow against the property for its development if you can find a lender to provide construction financing.
Thank you for the feedback - I've never done a "seller carry back", I'll look into that. (Do you have any tips on where to start researching?)
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
On a related note, I would like to get something in writing from this seller as I'm fairly certain that I'll go forward with it... but I don't want to keep explaining my ideas to him without some kind of protection.
What's my cheapest and most secure option to protect my interests in the property and the end goal?
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
11y
During my 'due-diligence'/ negotiating period I would tie it up with an exclusive option to purchase, sometimes just referred to as an Option. If you get a couple months, it shouldn't cost that much in consideration. In mine, I like to outline the method of purchase and who pays what closing costs, etc. Get it notarized and record it @James W.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
James, a land contract or contract for deed, (CFD) is an old and popular method of acquiring and losing properties, but since the bubble burst, Dodd-Frank, the SAFE Act, this is not a viable tool in the investor's tool box.
Recently, past few years, issues of title conveyances, circumventing foreclosure laws, unrecorded deeds have been added to the other difficulties with installment contracts, insurance, the due on sale clause with underlying mortgages (I bet that land is free and clear) and the ability to place future liens can be an issue.
You are not in title under a CFD, therefore you can not encumber the property, can't use it for financing. If your bank didn't explain this, they will when it is discovered.
Another issue with installment contracts are to servicing, making payments to a seller will present future financing issues. A seller's verification of payments will not be acceptable in loan applications as the seller has a vested interest in giving any indication of the contract being paid as agreed.
Not sure how WI sees a CFD, but since the buyer is never in title, building permits can be an issue, contractors and material suppliers may be limited in their ability to place liens on a property with debts incurred by someone who is not in title.
Your assumption that you must have 20% down for seller financing isn't correct, besides, the same equity argument could be made for any installment contract.
The seller could finance 100%. It really doesn't matter since any lender will require that loan to be subordinated to their loan, they must be in a first position. A CFD can not be subordinated, it's an installment sale, not a secured collateral position as notes are. The lender will require the CFD be paid off in the new loan, placing you in title in a position to grant a deed of trust.
You mentioned other assets, if you can swing the financing without the subject property, that may eliminate financing matters, but not all the issues.
Remember too, your seller can die, a buyer can get into a real mess with a CFD. While deeds may be escrowed, more often than not they are misplaced over the years. You can end up dealing with an Executor or Administrator as well as heirs and without proper servicing of the debt, questions and claims arise. Payments can be misplaced and by the time a buyer discovers the "default" deeds may have been filed. That puts you in a suit fighting for reinstatement and a judicial foreclosure. That can happen even if the seller doesn't die!
Do seller financing! Use a note and deed of trust. With the agreement to subordinate in the note for construction funding.
The tax benefit in this case will be short lived, not much paid to principal in 5 years, the seller just prolongs the agony. They will do much better taking a longer term. You can too, depending on the terms.
I would never dream of putting a half million in a property on a CFD, never! Take title and own it! Good luck :)
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
Good feedback, thanks everyone.
I'm leaning towards just buying the property, but I like the idea of an exclusive option while I'm doing the due diligence, which will easily take a couple months.
What's my best option to getting such an "option"?
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
Why not contract with seller financing, put in your due diligence period of 60 or 90 days, if acceptable, then close the deal. A good option contract will have the sale contract provisions, why make twice the work and pay an option fee? :)
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
@Steve B. If you don't have anything constructive to contribute please just stay out of my thread.
@Bill Gulley Is there an example of that kind of contract around here? I'm open to an option like that and would love to learn more about it.
I'm reading as much as I can here, BP seems like a great resource. I appreciate all the helpful posts and look forward to being part of this community for a long time to come :)
Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes
11y
How about you do a joint venture with the land owner to develop the property. Assuming that he is willing, you offer to him would look something like, he gets his money for the property first, then you split the profits beyond that.
Place the land into a new trust, with you and him both as a benificial interest and go seek financing. you state may want you to do this in an LLC or other entity. Talk to your local RE attorny for the best way to structure the deal.
My point is that a JV or LP will place added value into the project without you paying a penny and it allows him to make a bigger profit that just selling the land would gather for him
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
A JV is possible, it would be more complicated as well.
How many developments have you done yourself? Really, with this kind of money at steak, there is no excuse to DIY on this and mess it up, you need to see an attorney.
There are many ways to structure such transactions, but I think I'd want the seller out of the picture wearing the hat of a lender. If that doesn't work you can graduate to other avenues allowing the seller to pick more fruit.
The "forms" are a sale contract, write in the day of closing and inspection periods, a note and deed of trust, but you should see an attorney. Good luck :)
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
Hey @Bill Gulley Yes I do plan on getting an attorney involved at some point but I want to know which direction I'm going before I start paying those blood sucking vultures by the hour.
This will be my 5th commercial deal, but the first 4 were much more "vanilla". I've turned a $50k investment into almost 1.5 million in assets in the last 5 years, so I'm no dummy - I love playing with these deals, and for me it's just a matter of learning, which is why I'm digging this BP site.
As of right now I'm leaning towards giving the seller an offer contingent on my satisfaction of zoning, permitting, land use... And setting the close date out about 3 months, which will give me time to complete my homework.
Maybe give $500 in earnest money and request that the seller pay for the updated flood plain/ use study.
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
@Josh Caldwell I am ok with a JV on deals, but for this one I don't think it should be necessary. I have the cash to buy the land, but then I'd be a little short on the development costs.
I was originally trying to find a solid way to do it all immediately, but after considering some of the feedback posted here I feel like I need to bite the bullet, buy the land, and push my development out a couple years.
Instead of a land contract why not just get the sellers to do a seller carry back? They're only going to get the amount you agree to for the land contract sale, but instead of you as the buyer having exposure to the risks associated with using a land contract you'll actually take title. Holding fee simple title in the property is a more desirable approach and would then also allow you to borrow against the property for its development if you can find a lender to provide construction financing.
Thank you for the feedback - I've never done a "seller carry back", I'll look into that. (Do you have any tips on where to start researching?)
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
11y
Sounds like you're trying to be unnecessarily creative for the sake of being unecessarily creative. Another problem with seller carry is that he'll most likely need to subordinate for a construction loan and no smart seller should consider that. Your best bet is to just buy with the financing you need to develop or get an option to buy for a period of time long enough to cover the time you need to raise the funds.
We're only talking $200k here. If you actually own a $75K sports car... If you want to call it that (it is English made), $200k shouldn't be that hard for a high roller like you to raise. I drive a Toyota pick up truck and have multiple residential houses with that kind of equity.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
@James W.
mention didn't work for me....
Wasn't implying you're a dummy, congrats on your early success!
The owner of the land is usually required to sign off on applications, etc. for rezoning.
Two ways, talk to them and see the probability of rezoning, if that's good, buy it and you control the process.
Some sellers see $$$$ signs for assisting in the rezoning, they will be correct in that they are no longer selling some farm land but a commercial parcel. Their assistance should be written into the contract.
Rezoning requires notices, public hearing and 90 days could be pretty short, neighbors can hang you up too, that takes some PR work and politics at times. Rejoining is not a slam dunk thing and it can take months.
This was about a CFD, use a note and deed of trust, don't go the installment route!
I don't know what you know, I don't know what you don't know, as your inquiry is pretty vague at this point. Specific questions and your experience will help us help you.
Start another thread as to development, we're getting off topic as to financing, that way information doesn't get buried in the wrong category for those searching for such information.
Andrey, LOL, it's English! Parts from a F-150 won't fit. If you have to ask about maintenance, you can't afford it, car talk is Off Topic. :)
Hey @Bill Gulley Yes I do plan on getting an attorney involved at some point but I want to know which direction I'm going before I start paying those blood sucking vultures by the hour.
This will be my 5th commercial deal, but the first 4 were much more "vanilla". I've turned a $50k investment into almost 1.5 million in assets in the last 5 years, so I'm no dummy - I love playing with these deals, and for me it's just a matter of learning, which is why I'm digging this BP site.
As of right now I'm leaning towards giving the seller an offer contingent on my satisfaction of zoning, permitting, land use... And setting the close date out about 3 months, which will give me time to complete my homework.
Maybe give $500 in earnest money and request that the seller pay for the updated flood plain/ use study.
Any thoughts on that path?
"blood sucking vultures" I hear you. However, some of the best and most worthy investment dollars I've ever spent have been to a good real estate attorney.
I'm a sophisticate commercial real estate professional with extensive experience as both a professional and an investor. When serious money is in the line I have no problem spending a couple several thousand dollars ensuring my contracts, starting with the original offer, for a creative deal structure is right and protects my interests. Contracts can be changed after they've been agreed to but the issue with changing terms or contracts after the fact is the other party must agree to the changes. They are not obligated to agree to any changes in terms rather their only obligation is to honor the terms they originally agreed to.
Better to get it right the first go round to guarantee your deal structure is right for your circumstances and protects your interests as the buyer.
Wasn't implying you're a dummy, congrats on your early success!
The owner of the land is usually required to sign off on applications, etc. for rezoning.
Two ways, talk to them and see the probability of rezoning, if that's good, buy it and you control the process.
Some sellers see $$$$ signs for assisting in the rezoning, they will be correct in that they are no longer selling some farm land but a commercial parcel. Their assistance should be written into the contract.
Rezoning requires notices, public hearing and 90 days could be pretty short, neighbors can hang you up too, that takes some PR work and politics at times. Rejoining is not a slam dunk thing and it can take months.
This was about a CFD, use a note and deed of trust, don't go the installment route!
I don't know what you know, I don't know what you don't know, as your inquiry is pretty vague at this point. Specific questions and your experience will help us help you.
Start another thread as to development, we're getting off topic as to financing, that way information doesn't get buried in the wrong category for those searching for such information.
Andrey, LOL, it's English! Parts from a F-150 won't fit. If you have to ask about maintenance, you can't afford it, car talk is Off Topic. :)
Bill, you got me wrong. I can't stand to drive a car if the interior is melting or the automatic windows (ie things that should never break given how far we've come as a species tech-wise) go out every year. I dont like having even a weekend/fun car in the shop for a week any other month. Poor build quality is poor build quality, doesnt matter if its a $10k car or $150k one.
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
@Andrey Y. I busted the shifter but lotus covered the replacement and labor under goodwill because it's a known issue. Otherwise, nope! The engine is Toyota, so that's never going to give me problems. I'm very happy with it :)
Investor, Entrepreneur · Greenville, WI · Member since 2015 · 138 posts · 27 votes
11y
To get back on topic, I've decided to just put in an offer to purchase contingent on my satisfaction of permits etc.
I shouldn't have used the word "zoning" as its already zoned industrial and the county has told me my initial ideas for the land would be fine. My only real concern is some setbacks and the strict storm water management requirements in the area.
Thanks for the advice and for helping me think this through, everyone.
I will indeed post a new thread as I progress on this one.