Land Contract situation. Creative business deal :)

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Land Contract situation. Creative business deal :)

James W.
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?

TIA and bigger pockets = <3 !!!!

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Christopher Telles
Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
11y
Originally posted by @James W.:

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. 

 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.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @James W.

      your getting the cart before the horse... if your goal is to build this out.. and you at the end of the day are going to need your local bank to fund said construction.

    your next step and first step should be to sit down with your personal banker ( all high rollers have these LOL).. and talk through the stratigies and they will dictate what they will or will not do... once you know what your lender is going to do then you structure the deal.

    I suspect it will be a very short conversation with your bank saying they only do first position loans .. So your options as stated are have the bank finance the whole thing up front and cash seller out.. or have seller do a seller carry mortgage or deed and note which ever is used in your state.. And then subordinate that to your construction loan.

    However make sure you lender is good with a subordination some will some won't as they still want you to have some cash in the deal.. as a 100% subordination and your new first is a no money down deal.. and most banks these days.

    Putting significant improvements on a property you do not have title to is a very risky and should be avoided for the all but to obvious reasons.

    good luck with it...  

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