I checked the forums... most threads are about SELLING on a land contract. I want to know how to SEEK OUT land contract deals as a buy and hold strategy. Is there a method for searching these? How common are land contract deals? (rare?)
If you can give me tips for locating land contract properties for sale, I'd appreciate it.
(Also, is a land contract the same thing as a wrap-around?)
It is all about negotiating. You generally won't find land contract deals, they are negotiated. Basically a land contract is a type of owner financing. Few people offer owner financing, it is generally a creative buyer who suggests it.
You are going to have the best luck getting them from motivated sellers who have a lot, if not 100% equity.
A wrap is where a mortgage or (deed of trust) stays in place but the owner finances the deal and keeps the spread between the original loan on the property and the interest rate the owner is charging. This is an option when the owner has an existing loan.
Buying on terms in Georgia
Hi @CL Tumlin
I'll begin this discussion by saying buying on terms requires some investigation into pitfalls for both the seller and the buyer. There is a due on sale clause in every mortgage. The Garn St. Germain Act of 1982
stipulates certain exceptions to the due on sale.
There's a huge discussion on Due On Sale on bigger pockets. All I will say on the matter of due on sale there's that the mortgage company has the right to call the loan due, but that doesn't mean that they will call the loan due. It has been my experience I have never had the loan called due on a terms deal, but I always have a strategy to either negotiate with the lender or get a loan to refinance.
Land contracts or installment sales are common. It's like a car loan: for some money down, make some payments, get title when you finish making the payments. Sometimes there is a balloon. You get tax benefits. You have a type of ownership.
Wraparound mortgages or wraps in Georgia are somewhat common, but not as common as land contracts.
Wraparound mortgage is also called an all-inclusive mortgage, where the existing financing is wrapped around with a brand-new mortgage. You pay a payment to the owner, owner pays his mortgage payment and collects the spread, the difference.
Buying on "subject to", or "sub to", where the loan stays in the name of the seller for a period of time, but you as the buyer pay a bank directly, is an ideal way to buy terms. You have title and full control over the property.
Lease options can control the property, and I prefer new people to do a lease option assignment, where you lease option from the seller, and assign your interests to a buyer for a fee.
Sandwich lease options where you're in the middle of the transaction, have more risk, because you're responsible for that payment if the tenant buyer does not pay, and you have to evict.
For free and clear properties, let's say that you had a free and clear house that the seller wanted maximum sales price. You could offer a hundred percent of comps, but give them payments, say a seller financing payment that would allow you to rent the property out and get cash flow out of it.
All these tools are considered creative financing. Land trusts are used also for privacy with these transactions.
As the old saying goes, I can give you cash or terms.
It would be a low cash offer or more attractive price but on terms offer.
As @Ned Carey alluded to, it's all about the negotiation.
I show my home sellers that they have three ways to Solution for their home if they have to leave it:
One sell the home with an agent, and pay the costs to sell. These include sellers concessions, agents commissions, closing costs, holding costs, and spruce up costs to get the property ready for sale. These can add up to 10 to 15% of the appraised price.
Two, they can rent out the property and wait for appreciation. Also dealing with the tenant that might or might not cooperate with paying on time and keeping the property clean and tidy.
Three, they can look into seller financing or selling on terms, where they help a buyer buy the property on terms. In Georgia, sellers can sell on terms a couple different ways, but the bottom line is that you can make more money by selling on terms then by selling for cash traditionally with an agent. There and risk and rewards for every decision.
Lastly, on January 10, 2014, Dodd Frank was enacted. The ability to repay rule says that any property sold on terms, or seller financing, which includes lease options if there are rent credits, needs to have certain underwriting standards.
This only applies to owner occupant (OO) transactions, so if a landlord where to sell you their property on terms, and you are not living in it, you are leasing the property out, then Dodd Frank does not apply.
Also, there are some exemptions and exceptions from Dodd Frank for sellers of their residence.
I hope this helps.
I like to buy on terms and avoid banks.
Back to land contracts, (not really like a car loan there Brian, you get title to the car and the lender is a lien holder on title out here) this has been a popular transaction. Due to recent laws and legal issues, I suggest you avoid the contract for deed or land contracts. The issue is with executing a quit claim deed, 1, states may deem the deed being effective when made, not filed which just nullifies the deal and 2, such an arrangement is circumventing state foreclosure laws. Some states will require a judicial foreclosure at a stated equity amount, like 10%.
The CFD is one of the most abused transactions in RE, insurance can be a problem if not set up properly and loss interests assigned, rare to find in the old boiler plate forms. Another issue can be with contracting for repairs, obtaining permits, representation in legal aspects involving the property, obtaining special credits on assessments, such as a sewer going through.
The concept could be followed with a modification that includes default aspects more like a deed of trust agreement. Payment could be made as an installment sale and the deed delivered upon full payment. But why, when you can do a Sub-2 and hold title as a buyer? No good reason to.
I have seen listings where sellers will consider "terms", they are on CL as well, but such are usually with investors and most are on the scamming side, so watch valuation carefully, financing does not add value to a property!
While Dodd-Frank killed the CFD for owner occupants, you won't have those issues as a commercial transaction.
Lease-options are fine for the short term, not something for a buy and hold long term. A Sandwich lease, well, realize you're really doing twice the work as a middle man and you can't accomplish many of the landlord functions as you won't have the authority as an owner.
There can be better arrangements by having an installment purchase inside a LLC where the property is held in the LLC. Then you have partners and default in performing under the agreement and degrees of ownership are no longer a foreclosure issue. This also avoids many of the mortgage brokerage issues and loan servicing issues too.
There are always trade offs in selecting which path you take, to make the right decision you need to understand all the ramifications of what you do. :)
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