Selling Seller Fi on Land Contract vs. Note/Mortgage

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Selling Seller Fi on Land Contract vs. Note/Mortgage

Alain Perez-Majul
Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes

Hey guys! Was wondering what the main difference is between a land contract and note/mortgage sale (benefits, negatives). When it comes to the actual financing terms (ie. length of loan, interest percentage, etc), both a land contract or note/mortgage can accomplish the same thing. With a LC, deed stays in seller's name until note is paid off, in note/mortgage, dead transfers to buyer and lien is placed on the property via the mortgage. If the the buyer were to default, with note/mortgage you would foreclose on them, and at least in IN, to my understanding, one would have to go through the same process with a land contract buyer (as opposed to just evicting them), mainly due to large interest acquired by the buyer during the time they paid down the note. So in this regard, they're very similar. 

So for those with experience, what would be the reason you would choose one structure over the other? I've heard note/mortgages are "cleaner," and that it is also easier on the back end to sell the note to note buyers if it's structured as a note/mortgage, as they prefer it (I am ignorant as to why). What are the main pros/cons to weigh when considering either route? Are there benefits to each in different scenarios, and thus they should be considered on a case-by-case basis?

@Joe Villeneuve any thoughts?? I'm sure you're a knowledge bank on this one :P

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
6y

@Alain Perez-Majul

If it is in Indiana, a land contract you can seek a forfeiture on the buyer which can take 2-4 months versus a mortgage and note which takes much longer. In a forfeiture you get the property back, so if it has equity it’s great if it is upside down you have no recourse against the borrower.

Several downsides to land contracts are the property is in your name so nuisance liens etc attach to the property, until recently you would have also been responsible for unpaid utility bills as well.

With states getting more stringent on land contracts and forcing you to foreclose in many you are now better off with a mortgage and note. One exception is Indiana

As a sidenote if you go to sell the LC or mortgage, buyers will value the mortgage at a greater price than the land contract.

Be happy to chat further offline as I own a few hundred land contracts and can share more thoughts

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y

    You've probably asked.answered your own questions already , for the most part.  This includes your last question:  "Are there benefits to each in different scenarios, and thus they should be considered on a case-by-case basis?"

    Each deal is a stand alone as far as which option to go with...if you actually have both options.  Some deals can not be seller financed, and some deals can not be approved for a mortgage.  When you can do both, run the numbers for both, and see which option is accepted by the seller and which option is the best for you.

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  • Alain Perez-Majul
    OP
    Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y

    @Joe Villeneuve Sorry, I obviously wasn't clear enough. I was referring to being the SELLER on it, not the buyer, and also assuming you own a property free and clear, so that you actually have the ability to seller fi. Thus, if you're selling to a buyer seller financed, what are pros/cons in choosing LC vs note/mortgage, as the financing terms work the same regardless which route you go?

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Alain Perez-Majul:

    @Joe Villeneuve Sorry, I obviously wasn't clear enough. I was referring to being the SELLER on it, not the buyer, and also assuming you own a property free and clear, so that you actually have the ability to seller fi. Thus, if you're selling to a buyer seller financed, what are pros/cons in choosing LC vs note/mortgage, as the financing terms work the same regardless which route you go?

     Same answer...just exchange the words "seller" and "buyer".

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  • Alain Perez-Majul
    OP
    Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y

    Hmmm I think you lost me. If you're the one selling the property, and it's owned free-and-clear, what prevents you from doing either? You'd always have both options, would you not (ie. in what scenario are you "not approved" for selling on mortgage/note and you being your own bank)? The financing terms, depending on what you and your buyer agree to, would function the same way regardless of which of the two you pick, right? So why would one "run the numbers for both," as the numbers are the same? Additionally, on the tax side, your income from principal and interest from the note would be treated the same as well, regardless of the structure; and legally, in the event of a default, it appears that both would require a foreclosure to remove the non-paying buyer. 

    Again, the above is for a free-and-clear property that you want to sell on seller financed terms and carry the loan. If you're in this position, I still don't see what pros and cons you're weighing between LC and note/mortgage. I suppose other than the preference of keeping the deed in your name vs not, and I having heard that selling a note/mortgage deal to another investor is "cleaner" and more desirable than a land contract (still don't get why)....

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  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y
    My understanding is that with a Note and Mortgage, if you need to terminate for non payment it follows roughly a typical foreclosure process = timely and expensive. The benefit is that you *might* have an easier time selling the Note if you ever wanted to.

    The Land Contracts as I am familiar with them in my state are almost more like a 'rent to own' contract. As a buyer, you can be 'evicted' MUCH easier than you can-be foreclosed on with a Note/Mortgage. As a Seller, that could be a desirable thing. Not so much as the buyer.

    Back in the late 80s or early 90s when I was in involved farming there was a 'famous' case in our area that made the it into the Farm  Press of "Land Contracts Gone Wrong. Long story short Farmer A was "buying" (renting to own really, as the Deed does not pass until the last payment is made) what today would be about million dollar farm from Farmer B (really a group of heirs to the farm that had no interest in it other than the income if can produce).

    It was a 30 year contract (typical in farming) and Farmer A made payment for 25 plus years and had almost 90% of the principal paid plus interest. Farmer A also made several hundred thousand dollar of improvements along the way (one of the big "who pays what on a Land Contract"). Farmer A then had a couple of bad years, major family health problems and missed 3 monthly payments out of 300+ monthly payments and was EVICTED (since no foreclosure was needed) and the farm was taken back and promptly resold again. The remaining memeber of the Farmer B family were understandably shunned in the area after that, as it should be in my opinion.

    I am not sure WHY LCs were so much more popular than the Note/Mortgage method back then, but it was definitely the norm back then. Personally, I would NEVER buy on a LC.
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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    6y

    @Alain Perez-Majul

    If it is in Indiana, a land contract you can seek a forfeiture on the buyer which can take 2-4 months versus a mortgage and note which takes much longer. In a forfeiture you get the property back, so if it has equity it’s great if it is upside down you have no recourse against the borrower.

    Several downsides to land contracts are the property is in your name so nuisance liens etc attach to the property, until recently you would have also been responsible for unpaid utility bills as well.

    With states getting more stringent on land contracts and forcing you to foreclose in many you are now better off with a mortgage and note. One exception is Indiana

    As a sidenote if you go to sell the LC or mortgage, buyers will value the mortgage at a greater price than the land contract.

    Be happy to chat further offline as I own a few hundred land contracts and can share more thoughts

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  • Alain Perez-Majul
    OP
    Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y

    @Daniel Dietz Yeah, that would be such a tough and unfortunate situation to be in. 90% pay down to then be evicted... From what I understand, that is why rent-to-buy/lease-options can be tricky when it comes to evicting a tenant (investors often times think it's pretty cut-and-dry). Since there is built up interest via equity build up and [possible] physical improvements of the property, although technically one can simply evict the tenant, for all practical purposes a judge might consider the tenant-buyer's interest in the property and require a foreclosure instead of a simple eviction. This is simply what I've gathered from several conversations, and it's not something I have personal experience with. But it makes sense, and for example, in the case of your mentioned farming example, would seem fair to me.

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  • Alain Perez-Majul
    OP
    Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y

    @Chris Seveney awesome Chris, thanks for the feedback! A couple follow up questions from what you shared:

    1) I hadn't considered the recourse point. In a foreclosure involving a note/mortgage scenario, there is also no recourse, correct? 

    2) "As a sidenote if you go to sell the LC or mortgage, buyers will value the mortgage at a greater price than the land contract." Yup, exactly what I've heard before. But I still don't understand why- care to elaborate just a bit more?

    Appreciate your feedback!

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    6y

    @Alain Perez-Majul

    1. Yes a mortgage note you can go after the borrower for a deficiency. for example if the loan is $50k and they trash the place and you foreclose and it sells for $25k, you "could" go after them for the delta (reality is in most cases you are trying to get water from a rock - which is why its important to vet the borrower).

    2. Typically a mortgage and note is issued with a warranty deed and title. Most view it as "clean paper" where land contracts are typically sold via Quit claim deed transfers and title may be more clouded. Even with all things being equal, people view mortgages as more valuable. 

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  • Alain Perez-Majul
    OP
    Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y

    @Chris Seveney

    Excellent! Two important points to be mindful of, imo. Thanks for the clarification, Chris.

    Cheers

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  • Adrien C.
    Property Manager · Griffith, IN · Member since 2015 · 1k+ posts · 913 votes
    6y

    @Alain Perez-Majul An attorney spoke at my monthly investor group regarding this. The case law in Indiana is vague. It basically states a land contract goes from an eviction to foreclosure when the occupant has substantial equity. That's typical statue crap. Instead of a black and white % or something, it's in the courts hands to decide. Is substantial based on agreed price and the subsequent pay down. Is it based on the property improving due to repairs and market conditions? The attorney reviewed some of the view cased and it seemed like 8-10% equity was where the occupant had enough to force the foreclosure. 

    I prefer the mortgage route because it's not in my company name and the new owner can deal with the city issues if any.

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  • Alain Perez-Majul
    OP
    Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y

    @Adrien C. Exactly! Yes, I had heard the same, especially in regards to the fine line of going from an eviction to a foreclosure, and how it's up to the courts to choose. The 8-10% of equity loose rule of thumb by the attorney is good to be mindful of- appreciate that detail! And also, good point on the city issues... haha

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  • Aaron F.
    Investor · US · Member since 2017 · 71 posts · 80 votes
    6y

    Can anyone add whether liability/tort claims go for the seller of a land contract since they are still legal owner? It would seem like a LC seller would still need to carry liability insurance on a “sold” property. 

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