Land Contracts
Real Estate Agent · Burton, OH · Member since 2014 · 31 posts · 5 votes
Hello,
Was wondering if there is a better option for purchasing a free and clear property from a seller. He is suggesting a land contract. I pay taxes and insurance and he holds the deed. Balloon payment in 5 years. 4.5% interest. Amortized for 20 yrs. I was going to do this out of my IRA. Any suggestions or thoughts on this?
Luanne Dvorak
BUZZZZZZ, sorry Darrin, wrong answer, LOL
Seller financed mortgages, equity financed notes are installment purchases, tax is due as the percentage of principal received to the gain. Same with a CFD. Your sale price is 100%, your basis 80%, your gain is 20%, therefore 20% of the payment goes to the gain and is taxable.
Some state have specific statutes to govern land contracts, TX outlaws them, LA uses another version, OH allows them. However, just because they are allowed doesn't mean you should.
You really need to have these contracts serviced by a loan servicer, lots of ways for a seller to scam a buyer in a CFD, like throwing a payment check in the trash, you don't know it didn't clear until your next statement is received along with the demand to pay in full from the seller.
The deeds can be challenged as well, deeds are effective when made, not filed, the filing perfects the interest as public notice, but ownership or quit claiming back may be accomplished upon making the deed.
Title companies have issues because of the newer outlook on deed transfers, check with your title company.
The requirement to foreclose from the federal side as to installment sales is 10%, the IRS will look at the 10% mark as an installment sale in other arrangements.
Regardless of equity established, a borrower can push for a judicial foreclosure arising from a CFD, such statutes are stated as at a certain amount you must, not that at a lower amount you can't go to foreclosure which is usually best anyway. Circumventing foreclosure laws leads to other issues.
If a seller just files a QCDeed for default they are circumventing FC laws, a borrower could have improved a property taking their equity in excess of your stated amounts, don't forget appreciation that goes to the borrower or buyer.
Often, if there is a loan under the CFD, the due on sale applies and a seller may require separate insurance to avoid notices of the sale to the lender, in such case, your paying for two policies and you can have a mess for claims as the insurance companies will want rights of subrogation. Next insurance issue is cutting checks for losses to the seller.
In many areas, contractors won't contract with someone who is not in title as they don't have the authority to bind the contract allowing the contractor to file liens if necessary.
Same goes with municipalities, say you need a building permit, it is issued to the folks in title or as authorized by them to the contractor.
Taxes, they can be paid by anyone, tax credits go to an owner.
Bankruptcy and law suits, your seller holds the asset, his assets are at risk, and the terms of your sale may 1. be ignored treating you, the buyer as a creditor as if your contract equity were a lien or 2, force sale or 3. if the buyer has most of the equity they may ignore the seller's remaining equity and allow the sale to continue and lastly, the note is an asset it could be liquidated, I said lastly, I'm sure installment sales can cause other issues.....like in a divorce by the seller. Those are good refi opportunities for a lower payoff too.
The buyers financial statement, in some business transactions equity in installment sale purchases may not be counted, you don't own it yet.
You as a buyer can't tap the equity acquired with a second, you'll need to payoff the contract with a higher loan amount, that can drive the costs of getting equity out.
You can't pledge your equity as additional collateral, you're not in title but a seller could.
There are also issues with agreeing to any deed in lieu of foreclosure, I'll post a link later.
In some cases, either the buyer or seller can create other liens on the property, like a tax lien, these can usually be worked out at a sale or refi, depending on who is on the hook for what and why, but it's another PITA to deal with.
If the seller is ever in need of cash, a note is more marketable than any CFD, the seller can get a much better price. This can be important if you have an older seller and they ever have to qualify for medical benefits.
No, CFDs and mortgages with the deed being conveyed are not at all the same.
I suggest you do a note and deed of trust, it's much cleaner for both parties. If there is an underlying mortgage then do a subject-to transaction and take title. Use a loan servicer!
If a seller is uneasy thinking a CFD is easy for them, educate them (careful, if you know more than they do in some deals they won't sell to you, good indication of a scammer, BTW) you can agree in the note to higher initial payments to acquire more equity giving the seller enough to pay for those foreclosure costs that are never going to happen.
I have bought and sold on CFDs in the past, not the way to do things today, get the deed!
Here's a link on deeds.
http://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting
Hi luanne jermaine here, I am no expert, I do know you need to get your name on the deed.
Land contracts are popular in Ohio according to my relative there. In NC land contracts are regulated per NC General Statute 47H (http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/ByChapter/Chapter_47H.html) there may be a similar statute in Ohio (in Ohio Revised Code), I don't know. Check with your attorney, but the terms seem good and the use of a land contract seems appropriate from the limited details of your post. BTW, your name is not on the deed in a land contract.
A better option for the buyer would be a private mortgage.
Agreed, skip the Land Contract idea and go with a standard Mortgage. The terms can be the same. Costs will be similar for both. Enforcement wise, you both will have a better idea of where you stand and how to act in the event of a breach of contract. LC in Ohio does favor the Seller/Vendor a little bit.
The seller may be suggesting this path (LC) because of tax considerations. An installment sale via seller financing may have some benefits to the seller as well. I would ask him 'why a land contract' and get the seller's response. For my business, when a seller says anything about taxes, I tell him/her/them that I will pay for 1 hour (up to $200) for them to consult with a CPA of their choice (or my company's) to get the vital information for their circumstances and their needs. I do this as a 'contract courtesy' so they can make the right decision. The time we (my company/members) offer this is after we have a rough idea on terms... but I think you are already there.
I am currently purchasing a rental property in Ohio on a land contract. From my experience and others I have talked to they are pretty common there. Very similar to straight seller financing except you don't get the deed until you have fulfilled the terms of the contract. I believe it also makes it eaiser for the seller to take back the property in the event you default. My terms are 1k down, seller carries loan for 3 years at 3% interest at which time the house will be paid in full and I get the deed. Hope this helps.
@Luanne Dvorak Land Contracts and private mortgages both work well in your situation. From your perspective, there is really no difference. You control the property, get your deductions etc. As far as name on the deed, just make sure the Land Contract is recorded to keep you covered.
From the seller side there's these differences.
In case of default:
Taxes:
Where/how would you record a land contract?
BUZZZZZZ, sorry Darrin, wrong answer, LOL
Seller financed mortgages, equity financed notes are installment purchases, tax is due as the percentage of principal received to the gain. Same with a CFD. Your sale price is 100%, your basis 80%, your gain is 20%, therefore 20% of the payment goes to the gain and is taxable.
Some state have specific statutes to govern land contracts, TX outlaws them, LA uses another version, OH allows them. However, just because they are allowed doesn't mean you should.
You really need to have these contracts serviced by a loan servicer, lots of ways for a seller to scam a buyer in a CFD, like throwing a payment check in the trash, you don't know it didn't clear until your next statement is received along with the demand to pay in full from the seller.
The deeds can be challenged as well, deeds are effective when made, not filed, the filing perfects the interest as public notice, but ownership or quit claiming back may be accomplished upon making the deed.
Title companies have issues because of the newer outlook on deed transfers, check with your title company.
The requirement to foreclose from the federal side as to installment sales is 10%, the IRS will look at the 10% mark as an installment sale in other arrangements.
Regardless of equity established, a borrower can push for a judicial foreclosure arising from a CFD, such statutes are stated as at a certain amount you must, not that at a lower amount you can't go to foreclosure which is usually best anyway. Circumventing foreclosure laws leads to other issues.
If a seller just files a QCDeed for default they are circumventing FC laws, a borrower could have improved a property taking their equity in excess of your stated amounts, don't forget appreciation that goes to the borrower or buyer.
Often, if there is a loan under the CFD, the due on sale applies and a seller may require separate insurance to avoid notices of the sale to the lender, in such case, your paying for two policies and you can have a mess for claims as the insurance companies will want rights of subrogation. Next insurance issue is cutting checks for losses to the seller.
In many areas, contractors won't contract with someone who is not in title as they don't have the authority to bind the contract allowing the contractor to file liens if necessary.
Same goes with municipalities, say you need a building permit, it is issued to the folks in title or as authorized by them to the contractor.
Taxes, they can be paid by anyone, tax credits go to an owner.
Bankruptcy and law suits, your seller holds the asset, his assets are at risk, and the terms of your sale may 1. be ignored treating you, the buyer as a creditor as if your contract equity were a lien or 2, force sale or 3. if the buyer has most of the equity they may ignore the seller's remaining equity and allow the sale to continue and lastly, the note is an asset it could be liquidated, I said lastly, I'm sure installment sales can cause other issues.....like in a divorce by the seller. Those are good refi opportunities for a lower payoff too.
The buyers financial statement, in some business transactions equity in installment sale purchases may not be counted, you don't own it yet.
You as a buyer can't tap the equity acquired with a second, you'll need to payoff the contract with a higher loan amount, that can drive the costs of getting equity out.
You can't pledge your equity as additional collateral, you're not in title but a seller could.
There are also issues with agreeing to any deed in lieu of foreclosure, I'll post a link later.
In some cases, either the buyer or seller can create other liens on the property, like a tax lien, these can usually be worked out at a sale or refi, depending on who is on the hook for what and why, but it's another PITA to deal with.
If the seller is ever in need of cash, a note is more marketable than any CFD, the seller can get a much better price. This can be important if you have an older seller and they ever have to qualify for medical benefits.
No, CFDs and mortgages with the deed being conveyed are not at all the same.
I suggest you do a note and deed of trust, it's much cleaner for both parties. If there is an underlying mortgage then do a subject-to transaction and take title. Use a loan servicer!
If a seller is uneasy thinking a CFD is easy for them, educate them (careful, if you know more than they do in some deals they won't sell to you, good indication of a scammer, BTW) you can agree in the note to higher initial payments to acquire more equity giving the seller enough to pay for those foreclosure costs that are never going to happen.
I have bought and sold on CFDs in the past, not the way to do things today, get the deed!
Here's a link on deeds.
http://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting
Land Contract transfer equitable interest, but not the title. A note and mortgage would transfer title. Lots of things can go sideways with a land contract. If possible, give him a note secured by a mortgage - you get the title. Safer this way...
Good Luck!
If possible avoid the land contract and get title transfered with a seller mortgage.
I am currently purchasing a rental property in Ohio on a land contract. From my experience and others I have talked to they are pretty common there. Very similar to straight seller financing except you don't get the deed until you have fulfilled the terms of the contract. I believe it also makes it eaiser for the seller to take back the property in the event you default. My terms are 1k down, seller carries loan for 3 years at 3% interest at which time the house will be paid in full and I get the deed. Hope this helps.
Sheri,
I was wondering how your experience was purchasing your property in Ohio under a land contract? I am looking into the same thing to purchase my first property here. Thank you.
Garrett
@Garrett May
For the most part my experience has been good but My advice would be to make sure you use a good title company that is familiar with land contracts. I've only done this one land contract deal... My others I paid cash. I bought this one thru a Realtor and the first title company was clueless and after over 4 months of BS we pulled the file and took it to a different title company where it has been for a month and we are now looking to close Nov 1. The original title company needed to do an addendum due to a change in insurance amounts due to the original contract having an estimated amout since it was impossible to know the exact amount at the time we made the offer. But they couldn't figure this out and kept trying to redo this and redo that and kept going in circles then saying no forget that we need to do this etc... The whole time I'm saying "just do an addendum" and they kept saying they couldn't do that. It was so stupid. We took it to the new title company, tell the girl the while story and she takes one look at it and says "why didn't they just do an addendum?" We are now on track but the new company had to start the title search all over and there were a few things that had to be paid by the seller to clear the title so it still took awhile. The plus side is the sellers allowed me, in writing, to make the minimal needed repairs and procure a tenant before COE due to the delay. So, I already have it finished and rented and am making money on it despite the delay in closing.
BUZZZZZZ, sorry Darrin, wrong answer, LOL
Seller financed mortgages, equity financed notes are installment purchases, tax is due as the percentage of principal received to the gain. Same with a CFD. Your sale price is 100%, your basis 80%, your gain is 20%, therefore 20% of the payment goes to the gain and is taxable.
Some state have specific statutes to govern land contracts, TX outlaws them, LA uses another version, OH allows them. However, just because they are allowed doesn't mean you should.
You really need to have these contracts serviced by a loan servicer, lots of ways for a seller to scam a buyer in a CFD, like throwing a payment check in the trash, you don't know it didn't clear until your next statement is received along with the demand to pay in full from the seller.
The deeds can be challenged as well, deeds are effective when made, not filed, the filing perfects the interest as public notice, but ownership or quit claiming back may be accomplished upon making the deed.
Title companies have issues because of the newer outlook on deed transfers, check with your title company.
The requirement to foreclose from the federal side as to installment sales is 10%, the IRS will look at the 10% mark as an installment sale in other arrangements.
Regardless of equity established, a borrower can push for a judicial foreclosure arising from a CFD, such statutes are stated as at a certain amount you must, not that at a lower amount you can't go to foreclosure which is usually best anyway. Circumventing foreclosure laws leads to other issues.
If a seller just files a QCDeed for default they are circumventing FC laws, a borrower could have improved a property taking their equity in excess of your stated amounts, don't forget appreciation that goes to the borrower or buyer.
Often, if there is a loan under the CFD, the due on sale applies and a seller may require separate insurance to avoid notices of the sale to the lender, in such case, your paying for two policies and you can have a mess for claims as the insurance companies will want rights of subrogation. Next insurance issue is cutting checks for losses to the seller.
In many areas, contractors won't contract with someone who is not in title as they don't have the authority to bind the contract allowing the contractor to file liens if necessary.
Same goes with municipalities, say you need a building permit, it is issued to the folks in title or as authorized by them to the contractor.
Taxes, they can be paid by anyone, tax credits go to an owner.
Bankruptcy and law suits, your seller holds the asset, his assets are at risk, and the terms of your sale may 1. be ignored treating you, the buyer as a creditor as if your contract equity were a lien or 2, force sale or 3. if the buyer has most of the equity they may ignore the seller's remaining equity and allow the sale to continue and lastly, the note is an asset it could be liquidated, I said lastly, I'm sure installment sales can cause other issues.....like in a divorce by the seller. Those are good refi opportunities for a lower payoff too.
The buyers financial statement, in some business transactions equity in installment sale purchases may not be counted, you don't own it yet.
You as a buyer can't tap the equity acquired with a second, you'll need to payoff the contract with a higher loan amount, that can drive the costs of getting equity out.
You can't pledge your equity as additional collateral, you're not in title but a seller could.
There are also issues with agreeing to any deed in lieu of foreclosure, I'll post a link later.
In some cases, either the buyer or seller can create other liens on the property, like a tax lien, these can usually be worked out at a sale or refi, depending on who is on the hook for what and why, but it's another PITA to deal with.
If the seller is ever in need of cash, a note is more marketable than any CFD, the seller can get a much better price. This can be important if you have an older seller and they ever have to qualify for medical benefits.
No, CFDs and mortgages with the deed being conveyed are not at all the same.
I suggest you do a note and deed of trust, it's much cleaner for both parties. If there is an underlying mortgage then do a subject-to transaction and take title. Use a loan servicer!
If a seller is uneasy thinking a CFD is easy for them, educate them (careful, if you know more than they do in some deals they won't sell to you, good indication of a scammer, BTW) you can agree in the note to higher initial payments to acquire more equity giving the seller enough to pay for those foreclosure costs that are never going to happen.
I have bought and sold on CFDs in the past, not the way to do things today, get the deed!
@Bill Gulley, I know this was posted more than a year ago. I am not sure if it is proper to revive this thread or start another but since I wanted to explore your comments (most of which I agree with though I do not agree with your conclusion) I have chosen the former path. In my home state of Michigan, land contracts are fairly common and most title companies are familiar with them. The ones I use certainly are.
I have been selling many of my rental properties (many with long term tenants in place) to knowledgeable local investors (owner occupancy is prohibited--no Dodd-Frank/SAFE Act concerns) on land contract. One of the investors has purchased multiple properties from me. The transactions are simple. We have executed purchase agreements, land contracts and memoranda of land contract--all that is recorded are the memoranda.
These contracts are for terms of 3 years with balloons due upon maturity. I have done previous business with the counter parties, have no doubt that the terms of the contracts will be fulfilled (it is likely that the buyers will sell several of the properties before the contracts become due) and have no intention of taking advantage of my buyers nor do I think that they have any intention of taking advantage of me. In fact, should a circumstance arise that would make it difficult for the buyers to perform I suspect it will be fairly easy to find ways of extending, modifying, or terminating our agreements on mutually satisfactory terms. (Several default scenarios are addressed in the contracts but, as you know, not all possibilities can be anticipated nor addressed and if they were the contracts would be unwieldy.)
In the unlikely event that my buyers needed permits or to hire contractors I would gladly give permission or incur the expenses with full confidence that my buyers would reimburse my expenses. Yes, the tax credits go to me but the tax payments are also a business expense for my buyers. Isn't that a wash?
I could still count the asset on my financial statement but the buyers can count the income (these are rented and are cash flow positive to my buyers). I could pledge my collateral, it is unlikely I would, but my buyers know that. It is one of the reasons I conveyed these properties with very small down payments (the down payments for some was barely more than the tenant security deposits which I transferred to the buyers at closing).
None of these properties required any prep on my part to sell. The ones that were tenant occupied required no prep by the buyer. The ones that were vacant were transferred without my having to clean or repair them--the buyers were going to prep them to their standards and the expense was simply addressed in the price and other terms of the contract.
I have converted the income streams I had from my rentals into income streams that require very little effort. I am now paid a few days before payments are due (the funds are transferred directly to my account) and have no tenant contact nor any responsibility for maintenance. My buyers have added cash flowing properties for minimal down payments and on favorable terms. They are free to sell them again at a profit any time they wish. I have been very pleased with the way these transactions have progressed and the way they have enhanced my relationships with my investor buyers. I am in the process of purchasing another property that meets the needs of an investor to whom I will immediately sell the property on land contract after taking possession.
Jeff, my conclusion is the same as the ALTA legal eagles in the link I provided above;
I love installment contracts, just love them! And, since that last post, this year there are new sale recognition rules under IRS code, if your sale term is greater than 12 months.
You seem to be buying without financing so you'll have no due on sale issues + !
You are also selling on a commercial loan basis, another + !
All real estate is local, but often local customs become outdated due to other influences, such as financing laws, tax code, accounting requirements and your local circuit court judges and local attorneys may not be aware of such changes, that's often the case.
As to "carrying the asset", after an installment sale you carry the value of the contract, the note, not the real estate (unless you are in a TIC sale). The buyer carries the property less the liability. This is to booking assets on your financial statement.
However, agreements can be made to pay real estate taxes, but doing so doesn't shift the allocations of assets on your statements.
If you were to "pledge" the property as collateral, you're tipping into fraud as the property has been sold, what you can pledge is your contract as an earning asset.
No bank can finance a property that was sold lending on legal title financing the seller, they also won't do buyer financing as a second behind an installment sale, they will refinance for a first position.
You can encumber the property, but at the risk of your buyer taking action against you, you're encumbering the equity interests of the buyer. This falls under the UCC concerning installment sales. While legal title is not conveyed all ownership rights (bundle of sticks) are conveyed. A seller has no obligation for maintenance, but could agree to "assist" or provide support, a durable power of attorney for the buyer to contract work and obtain permits if that is an issue.
If a buyer hires a roofer and doesn't pay the the roofer has an issue as the buyer didn't have legal title to encumber the property, he may not be able to file a valid lien, so the issue can be what contractor would be willing to do work without the assurance of lien protection? Also a title issue.
If deeds are now seen as being effective when executed and not filed, then executing a warranty deed then a quit claim deed is a wash, regardless of when they are filed. This was pointed out in the link I mentioned above.
Regardless of any agreement to the contrary, filing a QCD to re-convey interests is circumventing foreclosure laws and can also be predatory lending as these laws have changed federally.
To comply with foreclosure laws you'll need a deed of trust arrangement incorporated in your installment sale contract. Don't use a QCD or prearranged agreements to provide a deed in lieu of foreclosure (DIL). If a buyer offers to provide a DIL, you can certainly accept one. Making it a loan condition is predatory.
I seriously doubt you'll find any compliant CFD floating around today. Any type of contract is simply an agreement to guide the parties to an intended outcome, so long as all goes well, you have no issues. Between certain parties, things can go as planned, but you're never guaranteed things go as planed between individuals, there are life events that can mess you up being unconventional or creative.
With proper modifications to a commercial installment sale, I'd say go for it! But, now you do need to visit a CPA familiar with the tax and accounting changes. You'll also need a more creative attorney who is aware of installment sales in today's environment, who doesn't simply rely on the old boilerplate written 10 years ago for the Bar Library. And certainly don't be trusting gurus or layperson investors for a good contract.
And, your collection method is good! Buyers should be making deposits to a depository to prove payment and it gives you the best audit trail for taxes. :)
@Bill Gulley, thanks for your response. I appreciate considering knowledgeable opinions which differ from mine or alert me to possible issues. Makes me a better investor.
I would suggest contacting the company you are using for your self-directed IRA custodian. They should have the best answer for you. If you're not using one yet, I can refer you to one that is a specialist are real estate self-directed IRA's in Michigan. Just shoot me an email.