Land Contract/Agreement for Deed instead of Novation for quick Flip

Realtor · Fort Worth, TX · Member since 2021 · 779 posts · 368 votes

@Austin Snyder From my understanding novations are on not allowed on the MLS in Texas. I previously tried to do this and was told its against MLS rules by my broker who is on the board for North Texas. So maybe just publicize it on FB market place

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Austin Snyder

OP

Rental Property Investor · Tampa, FL · Member since 2019 · 12 posts · 2 votes

2y

Hey @Preston Dean

Thank you for the response. To clarify, I was wanting to set this up as a land contract instead of a novation. But it's sort of similar. I'm paying them cash to leave, then I'm essentially just fixing it up really quick and selling it. I was going to get them to sign a land contract outlining the terms, so me being authorized to make the payments of the current mortgage, allowing me to renovate the property, and allowing me to sell the property on the MLS once it's renovated. I was going to record a memorandum for the down payment and outlining that we have an agreement that I get the full profit of the deal once sold.

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Preston DeanBusiness Member

Realtor · Fort Worth, TX · Member since 2021 · 779 posts · 368 votes

2y

Oh gotcha I'm not familiar with land contracts. Good to know though!

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T. Alan CeshkerPro Member

Attorney · 3409 Executive Center Drive Ste 110 Austin, Texas 78731 · Member since 2020 · 99 posts · 92 votes

2y

Lots going on here.

Novations can be listed in Texas if done correctly. Just cannot use the out of state guru novation documents.

A better structure is a JV agreement with a deed to the JV and investor controls JV. It is cheaper, easier and more secure. Reach out if you want an info doc on this.

Not getting title insurance is foolish. Not getting at least a title search is off the wall crazy.

Land contracts/trusts will work but they are passive trusts and individual liability will continue. They are also frowned upon by the title underwriters.

These types of investment strategies should only be pursued by seasoned investors that have done them a few dozen times or in close cooperation with a law and title office that knows these systems.

Be safe out there guys

Alan

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Don KonipolBusiness Member

Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes

2y

Quote from @Austin Snyder:

Hello I'm hoping to get some insight on if this deal structure makes sense. I've bought properties before via "Subject-To" but I've never done a novation or a land contract.

Deal Details

I have some sellers who are falling behind, but they have a good mortgage at 3.25% interest rate. The property needs some work but not much. Planning to give them about $10,000. Take over mortgage of $125,000. Put about $20,000 or less in repairs, then sell it on MLS for about $220,000.

My plan was to "self-perform" a land contract by filling out a purchase and sales agreement for a land contract that specifies I will take over the mortgage payments, get authorized on their mortgage, and be authorized essentially to fix up the property and eventually sell it on the MLS since the land contract will give me that control/equitable interest. So I was going to start title search first, then if it comes back clear I'll give them about $10k cash for them to move out and catch up on bills, then fix the place up really quick and turn around and sell it on the MLS. Then payoff their mortgage/liens and I take the rest.

If I structure it this way I've been told I don't necessarily need to go through a title company and formally "Close" on the property which would save me a few thousand bucks. I think it would be lower risk than a novation since I'll have more control. Instead I would just need to do the title search first, then once I pay the down payment file a memorandum for the amount I paid them, and then record the purchase and sale contract/land contract with the county so it's on record and clouds the title for extra protection.

Does that sound like I am doing this right or should I just buy the property subject-to with maybe a one year balloon, then just bite the bullet and close on the property and once it's fixed up turn around and sell it again. My biggest concern other than the closing costs was that if an FHA buyer tried to come buy it my understanding is they would need to wait 90 days from when I bought it and I think it would only take about a month to fix it up. Any insight here is greatly appreciated!!

This is one of those creative ideas (I LOVE creative ideas!) that sounds good in theory, shows great innovation on the part of the OP, but has a huge risk in practice. Here’s the problem. About 15 years ago contract for deeds were virtually eliminated in Texas by legislation which not only limited the benefits of using a CD, but introduced severe penalties for even minor issues of non compliance. As a result I know of no title company that will insure a CD, and the real estate attorneys I know won’t even draw up CD docs. Yes, theoretically they can be used and all laws complied with, but the chances of losing a lawsuit whether you’re right or wrong are so great nobody uses them, nobody insures them. This is a case where they were essentially banned for a specific reason, and now even their use for legit reasons is basically gone.
My advise (not legal advice as I am NOT an attorney ) is just purchase the property SUBJECT TO the existing mortgage. If you determine that your $10k investment and $20k repairs are not worth the cost of title insurance, then pay for a TITLE OPINION.
If your numbers are correct, you may have a BIG $ winner here; there’s enough room to spend extra to ensure a problem free transaction, imo. Please let us know how it all turns out!

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Peter Walther

Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes

2y

I agree with Don that acquiring an interest in property without a title policy is short sighted. However, I just checked a national underwriter's manual, and it appears CD's are insurable, but there are criteria unique to them. I suggest you check with a local agent to ask about getting a policy in your situation. Many people are unaware of the limitation of liability if they get a title search, and something is missed. Personally, if I relied on one, I'd assume I'm self-insured if something is missed. Keep in mind that if you want to get a loan while you're a contract purchaser your lender will probably not be able to get a title policy since you don't own the property and cannot put a lien on it.

Also, since you'll need a deed from your seller when you're ready to resell, what do you do if he's in the wind since he's already been paid in full?

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Guy Gimenez

Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes

2y

Quote from @Preston Dean:

@Austin Snyder From my understanding novations are on not allowed on the MLS in Texas. I previously tried to do this and was told its against MLS rules by my broker who is on the board for North Texas. So maybe just publicize it on FB market place

Each MLS will have their own rules but the State of Texas doesn't regulate who can and cannot market on such a platform. For instance, in my area, anyone with an equitable interest or a limited POA can market the property. Of course, the party with an equitable has to clearly state that they do not own the property and that they merely intend to assign the contract, if in fact that is there intention. In a sub-to or Novation, it's typical to get a limited POA with allows for advertising the property on behalf of the seller.

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Christopher Robert Noland

Investor · Seattle, WA · Member since 2023 · 87 posts · 44 votes

2y

Your deal structure involves a hybrid approach of a land contract, "subject-to" financing, and flipping. Here’s a breakdown of how it works, and some key insights:

1. Overview of Your Plan

Sellers Falling Behind: You plan to give them $10,000 to move out and catch up on bills.
Existing Mortgage: You would take over their mortgage ($125,000 at 3.25%).
Repairs: You’ll invest $20,000 or less in repairs.
Exit Strategy: Sell on MLS for $220,000 after repairs, then pay off the existing mortgage and take the profit.

2. Land Contract vs. Subject-To Financing

Let’s compare the options and assess your current structure:

Land Contract (Installment Sale Agreement)

How It Works: In a land contract, you (the buyer) take equitable title to the property, make payments toward the mortgage, and eventually take full ownership after all payments are made. The seller retains legal title until the contract is fulfilled.
Advantages:
- Lower Upfront Costs: You can avoid closing costs typically associated with formal closings.
- Control: You can take control of the property to make repairs and sell it while leaving the original financing in place.
- More Flexibility: Compared to a novation, a land contract offers you more control over the property since you hold equitable interest.
Risks:
- Seller’s Cooperation: The seller retains legal title, which can complicate things if they change their mind or their financial situation worsens.
- Resale Issues: FHA buyers may require the deed to be in your name for 90 days before they can purchase, which could slow down your resale plans.

Subject-To Financing

How It Works: In a subject-to deal, you take title to the property while the seller’s existing mortgage stays in place. You make the mortgage payments on their behalf.
Advantages:
- Full Ownership: You gain full legal title to the property while keeping the favorable 3.25% interest rate.
- Control: You have more control over the sale because you hold the deed.
- Simpler Resale: Since you hold title, you avoid the complications of a land contract when reselling, especially to FHA buyers.
Risks:
- Due-on-Sale Clause: The lender could potentially enforce the due-on-sale clause if they find out you’ve taken title, though this is relatively rare in practice as long as payments are made.
- Higher Closing Costs: You would need to close formally and cover title, closing, and potentially transfer costs.

3. Insight on Your Proposed Plan

Title Search and Memorandum

Title Search: Conducting a title search is a good idea regardless of the structure to ensure there are no outstanding liens, claims, or legal issues that could complicate your plans.
Memorandum: Filing a memorandum or recording the contract with the county provides some protection by clouding the title and ensuring your equitable interest is recognized. This is a key step if you move forward with a land contract.

Closing Considerations

Avoiding a Formal Closing: Skipping a formal closing saves on costs but increases the risk. Without a formal transfer of title, you’re more vulnerable if something goes wrong with the seller (e.g., bankruptcy, further liens, or disputes). If you’re confident in the seller’s cooperation and financial standing, it may be worth the risk, but it’s important to assess this carefully.
Balloon Payment Option: If you go the subject-to route, you can include a balloon payment structure to mitigate the lender’s risk or the seller’s concerns, while giving you time to repair and resell the property.

4. Resale Considerations

FHA Buyer Requirements: You're correct that FHA buyers typically cannot purchase a home that was sold less than 90 days ago. This could impact your resale if you plan to flip the property quickly. If you anticipate an FHA buyer, subject-to financing might be the better route since you would hold title for the required period.
Non-FHA Buyers: If you target conventional buyers or cash buyers, the 90-day rule won’t be an issue, which could give you more flexibility in choosing the structure.

5. Recommendation

Given your goal of minimizing upfront costs while keeping control, here’s how you might proceed:

Conduct a Thorough Title Search: Before committing, make sure there are no surprises in the title. This will give you a clear picture of any liens or claims that could affect your plan.
Consider Subject-To Financing: This gives you more control over the property, simplifies resale (especially if an FHA buyer is involved), and eliminates risks associated with the seller retaining legal title.
Weigh the Risks of a Land Contract: If you’re looking to avoid closing costs, a land contract could work, but ensure that the seller is financially stable and cooperative. Also, make sure to file the necessary documents to protect your interest.
FHA Buyer Strategy: If you think you'll be reselling to an FHA buyer, go the subject-to route and hold the property for at least 90 days. Alternatively, target non-FHA buyers to avoid this issue altogether.
Consult a Real Estate Attorney: Ensure your contract language is solid, especially with regard to title protection, seller obligations, and your rights in the event of default or dispute.

By balancing your need for control with the costs of formal closing, you can structure a deal that works for both you and the seller while protecting your investment.

4o

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Land Contract/Agreement for Deed instead of Novation for quick Flip

Land Contract/Agreement for Deed instead of Novation for quick Flip

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1. Overview of Your Plan

2. Land Contract vs. Subject-To Financing

3. Insight on Your Proposed Plan

4. Resale Considerations

5. Recommendation