I just agreed to a land contract?!

15 Replies

We just shook hands on a 6-plex deal-- owner financing-- 185K, 37K down at 3.9%, 30 year amortization, 10 year balloon.  But he kept saying "land contract," and I didn't ask what he meant (face palm!!).  When we got back in the car, I realized that this is like contract for deed, which I have never researched properly.  I just assumed that it was the same thing as a Trust Deed.  

I'm googling feverishly, but I'll take all the help I can get.  There is no official written offer yet-- are there big disadvantages to land contracts?  I don't totally understand the idea of "equitable title," and what are the disadvantages of not holding the deed, etc. The property is in Wisconsin.

Thanks!! 

Updated 6 days ago

I'm obviously a fool for not knowing the term "land contract." He's just an old-timer (literally doesn't use the internet), so I just assumed that it was some kind of out-of-date term. It looks like we definitely want to stay away from this type of financing if at all possible. I will ask him if he will consider a trust deed (more facepalm!!!).

If you are a buy & hold investor, the Land Contract doesn't mean much for you unless you were trying to then sell the property or obtaining additional financing with this property as collateral. The details are what matters, just as they would in any other deal. Are there prepayment penalties, is prepayment allowed, when are you granted possession, is the Vendor paying for title insurance on the front-end or are you responsible for it? One unique aspect of a Land Contract is, are you responsible to pay Vendor directly for property taxes & insurance, or are you responsible to pay property taxes & insurance directly? Vendor is able to call the balance immediately due (page 3 of the WI Land Contract form 11-2003) if you fail to pay as this page outlines.

To be honest, as long as you're holding up your end of the deal it's more of a risk to be a Vendor than a Purchaser in a Land Contract because they're assuming the risk that you run the property into the ground then have to take it back via foreclosure. In my opinion 20% down, 3.9% interest. 30-year AM with a 10-year balloon is a good setup for you for a 6-unit property, as commercial financing in my area is 20% down, 4% interest, 20-year AM with a 5-year balloon.

Were there any specific concerns you had about a Land Contract? I have been the Purchaser in a Land Contract for almost 6 years now and I worked on a fair amount of them with clients in a previous life so I know enough to be dangerous.

Originally posted by @Brad L. :

If you are a buy & hold investor, the Land Contract doesn't mean much for you unless you were trying to then sell the property or obtaining additional financing with this property as collateral. The details are what matters, just as they would in any other deal. Are there prepayment penalties, is prepayment allowed, when are you granted possession, is the Vendor paying for title insurance on the front-end or are you responsible for it? One unique aspect of a Land Contract is, are you responsible to pay Vendor directly for property taxes & insurance, or are you responsible to pay property taxes & insurance directly? Vendor is able to call the balance immediately due (page 3 of the WI Land Contract form 11-2003) if you fail to pay as this page outlines.

To be honest, as long as you're holding up your end of the deal it's more of a risk to be a Vendor than a Purchaser in a Land Contract because they're assuming the risk that you run the property into the ground then have to take it back via foreclosure. In my opinion 20% down, 3.9% interest. 30-year AM with a 10-year balloon is a good setup for you for a 6-unit property, as commercial financing in my area is 20% down, 4% interest, 20-year AM with a 5-year balloon.

Were there any specific concerns you had about a Land Contract? I have been the Purchaser in a Land Contract for almost 6 years now and I worked on a fair amount of them with clients in a previous life so I know enough to be dangerous.

Thanks for the reply. That's somewhat heartening. I'm nervous because I don't know anything about land contracts. What is the exit strategy? We are buy and hold investors, and we are planning to put a lot of cash into adding a 7th unit . But how do you pay it off at the 10 year mark if you can't refinance? And what if you want out?

 

Originally posted by @Brad L. :

If you are a buy & hold investor, the Land Contract doesn't mean much for you unless you were trying to then sell the property or obtaining additional financing with this property as collateral. The details are what matters, just as they would in any other deal. Are there prepayment penalties, is prepayment allowed, when are you granted possession, is the Vendor paying for title insurance on the front-end or are you responsible for it? One unique aspect of a Land Contract is, are you responsible to pay Vendor directly for property taxes & insurance, or are you responsible to pay property taxes & insurance directly? Vendor is able to call the balance immediately due (page 3 of the WI Land Contract form 11-2003) if you fail to pay as this page outlines.

To be honest, as long as you're holding up your end of the deal it's more of a risk to be a Vendor than a Purchaser in a Land Contract because they're assuming the risk that you run the property into the ground then have to take it back via foreclosure. In my opinion 20% down, 3.9% interest. 30-year AM with a 10-year balloon is a good setup for you for a 6-unit property, as commercial financing in my area is 20% down, 4% interest, 20-year AM with a 5-year balloon.

Were there any specific concerns you had about a Land Contract? I have been the Purchaser in a Land Contract for almost 6 years now and I worked on a fair amount of them with clients in a previous life so I know enough to be dangerous.

The other question is, will he agree to a deed of trust (is this the standard term?), or is there a big tax advantage for him if he does a land contract?

 

Make a few phone calls to Title Companies in your area to and ask a ton of questions.  Most likely, you will come across one or two that will work with you on the Land Contract.  Sounds like a good deal just keep the ball moving forward.  Good Luck!

Originally posted by @Ron Szmik :

Make a few phone calls to Title Companies in your area to and ask a ton of questions.  Most likely, you will come across one or two that will work with you on the Land Contract.  Sounds like a good deal just keep the ball moving forward.  Good Luck!

 Thanks, Ron. I didn't think to call title companies. I will call them and lawyers tomorrow (real estate agent was really no help). 

Meredith:

I'm only licensed to practice law in your state of Minnesota, so keep that piece in mind.  However, you are correct that the Land Contract is Wisconsin's version of the Contract for Deed.  Wisconsin law actually is a lot nicer to the vendee than Minnesota.  In Minnesota, there isn't even a redemption period when you default on a Contract for Deed.


In Wisconsin, each of the remedies upon default actually give that to you.  The owner is indeed likely doing this for the tax benefits.  If you have more specific questions, I'll do my best to give you advice with my licensing in mind.  I normally don't answer too specifically on these things, but I am licensed in your state of residence.

Another pro/con to think about is that CoD's and Land Contracts are not often reported to the credit bureaus.  This can have an affect on your credit score.  While late payments won't affect you, neither will paying the loan on time or in accordance with the terms.  Additionally, an enforcement action in Wisconsin will be in court.

This is another difference for Wisconsin as opposed to Minnesota.  Most CoD defaults in Minnesota do not involve court actions.  So, a lawsuit to remove you from the title in Wisconsin could look like a foreclosure on your credit report where in Minnesota this is often not the case.  CoDs can be a better deal in Minnesota depending on circumstances rather than traditional financing.


Keep all of this in mind.  Choosing when to refinance out of this Land Contract can provide you a lot of flexibility however.  You'll also always know your creditor.  Many mortgages are packaged and sold off to investors.  The Land Contract likely won't be sold.  A good relationship with this creditor can provide a lot of flexibility if something goes wrong.


-Additionally, this is my opinion and not formally legal advice. I don't know all the facts from just what you posted.-


I'm not an attorney and this is just my opinion.

I suggest you talk with a good WI real property attorney.

I suspect you'll want to make sure something codifying your equitable interest is recorded in the public records of the county where the property is located otherwise a third party who lends money to or obtains a judgment against the Vendor my have priority over your interest since they didn't have constructive notice of it.

I don't know much about WI law but it may be the seller wants a land contract because if you default he may just need to record a notice of the breach to clear your interest from the record rather than having to bring a foreclosure action.  That's one of the reasons I recommend you speak with a good WI real property attorney.

In reference to @Peter Walther post about foreclosure, the following is copy & pasted directly from the State Bar of Wisconsin Form 11-2003 Land Contract:

"Purchaser agrees that in the event of a default in the payment of principal or interest which continues for a period of
days following the due date or a default in performance of any other obligation of Purchaser which continues
for a period of days following written notice thereof by Vendor (delivered personally or mailed by certified
mail), the entire outstanding balance under this contract shall become immediately due and payable at Vendor's option
and without notice (which Purchaser hereby waives), and Vendor may singly, alternatively or in combination: (i)
terminate this Contract and either recover the Property through strict foreclosure or have the Property sold by foreclosure
sale; in either event, with a period of redemption, in the court's discretion, to be conditioned on full payment of the entire
outstanding balance, with interest thereon from the date of default and other amounts due hereunder (failing which all
amounts previously paid by Purchaser shall be forfeited as liquidated damages for failure to fulfill this Contract and as
rental for the Property); (ii) sue for specific performance of this Contract; (iii) sue for the unpaid purchase price or any
portion thereof; (iv) declare this Contract at an end and remove this Contract as a cloud on title in a quiet-title action if the
equitable interest of Purchaser is insignificant; (v) have Purchaser ejected from possession of the Property and have a
receiver appointed to collect any rents, issues or profits; or (vi) pursue any other remedy available in law or equity. An
election of any of the foregoing remedies shall only be binding on Vendor if and when pursued in litigation. All costs and
expenses including reasonable attorneys fees of Vendor incurred to pursue any remedy hereunder to the extent not
prohibited by law and expenses of title evidence shall be paid by Purchaser and included in any judgment. The parties
agree that Vendor shall have the options set forth in this paragraph available to exercise in Vendor's sole discretion."

My suggestion to you is to print off a blank copy of the entire Land Contract form and read through it a couple times. If you aren't 1000% confident that you understand the entire form, get an attorney. You really should get an attorney regardless but I know most try to skip that part to save a little money, when in reality the attorney could save you a lot of money in the long run.


The fact that Wisconsin requires a redemption period makes it a really great state for seller financing. Most states allow you to have your equity extinguished with no redemption period for Contracts for Deed/Land Contracts. Wisconsin treats them more like true seller financed mortgages. You will at least get a day in court with a redemption period. Who can say how long that is?


But with these protections in mind, it might be preferable to use them in Wisconsin.  It could certainly lead to more deals if you only have to meet the Seller's personal standards rather than mortgage underwriting standards.  There are cons just like there are pros to this approach.  They are very common in Minnesota and Wisconsin.  They also do get recorded in the land title records.

While the Seller might want to just use the bar's form or a form that they find on the internet, you might benefit from having an attorney look at it.  Additionally, if you get some tweaks to the form that you really like, it will be one that you can use for more than one transaction.  This kind of financing could even become kind of like a niche for you.

@Peter Walther      This might be a fear for some, but it shouldn't be in Wisconsin. So long as the Land Contract is recorded, even a mortgage has been found to be junior to it. See: Fair Finance Corporation v. Roomates, LTD, et al., 2015AP728 (March 17, 2016).

There have been instances where a mortgage or other lien was allowed to attach to the Vendor's interest to allow the creditor to simply garnish the Land Contract payments.  That is also very common for the holders of any note or mortgage.  Far more common for private mortgages such as this, but something to also keep in mind if you invest in mortgages and promissory notes.

There are always outlier fact patterns, but a judgment creditor is not going to be able to jump priority like that in most cases and states.

Contracts for Deed and Land Contracts generally are most favorable to the seller in most states.  Wisconsin's laws are much more balanced though.


Land contracts are no big deal I use them myself and write them all the time. The mortgage lenders do not mention them so most people do not know about this option. But among investors it is one of the first things you learn in WI.

The exit strategy is the same for any commercial loan. Commercial loans have a balloon payment in there every 3-5 years too. The banks are just not as loud about that. So you just need to plan ahead to be able to refinance when the time comes. A favorable interest rate will do that. After 10 years you should definitely have enough equity to refinance without any trouble.

an LC is a form of owner financing, like any other, the seller retains the deed till the contract is fulfilled if you dont hold up your end, the seller has the right to the property back as liquidation for damages, just like a mortgage. 

Here in WI a Land Contract is looked at just like a Mortgage, I hold one on a lot I sold, and recently went down the road of determining my rights under the law, I am in 1st position, and if an action  is needed I would have to foreclose just like a mortgage, your state may be different, but the concept is the same. tax wise its the same, everything is pretty much the same, just that you are buying the deed over time

Originally posted by @Michael Redden :

@Peter Walther      This might be a fear for some, but it shouldn't be in Wisconsin. So long as the Land Contract is recorded, even a mortgage has been found to be junior to it. See: Fair Finance Corporation v. Roomates, LTD, et al., 2015AP728 (March 17, 2016).

There have been instances where a mortgage or other lien was allowed to attach to the Vendor's interest to allow the creditor to simply garnish the Land Contract payments.  That is also very common for the holders of any note or mortgage.  Far more common for private mortgages such as this, but something to also keep in mind if you invest in mortgages and promissory notes.

There are always outlier fact patterns, but a judgment creditor is not going to be able to jump priority like that in most cases and states.

Contracts for Deed and Land Contracts generally are most favorable to the seller in most states.  Wisconsin's laws are much more balanced though.

Heartfelt thanks for all of the replies-- this is just exactly the information I need. I did talk to a title company and two lawyers, and got lots of help. We will for sure use a lawyer to write the land contract because the standard form needs some tweaking. The contract will be recorded with the county immediately. 

Is there anything I need permission to do (attorney said I might need permission to renovate??)

Thanks! 

 

Originally posted by @Scott Schultz :

an LC is a form of owner financing, like any other, the seller retains the deed till the contract is fulfilled if you dont hold up your end, the seller has the right to the property back as liquidation for damages, just like a mortgage. 

Here in WI a Land Contract is looked at just like a Mortgage, I hold one on a lot I sold, and recently went down the road of determining my rights under the law, I am in 1st position, and if an action  is needed I would have to foreclose just like a mortgage, your state may be different, but the concept is the same. tax wise its the same, everything is pretty much the same, just that you are buying the deed over time

This property is also in WI (Independence). This is all great to hear-- thanks!