Do you invest in Land Contracts? Why or Why Not

Tax Liens & Mortgage Notes
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Do you invest in Land Contracts? Why or Why Not

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

For those who invest in notes, the number of notes for sale has been limited compared to the number of contracts for deeds (aka land contracts, an agreement for deed, CFD's etc) I see on the market.I know some investors shy away from them because they are lower priced assets and have a higher risk. Others have done very well investing in them.

I am curious what your take is on them, and also would you recommend them for newer investors?  

I would recommend if a newer investor does invest in CFD's, they need to know upfront there are inherently more risks. While they have a much lower barrier to entry (thus you may have less to lose), there is a much higher risk the property would need significant work and if you were to take it back you may end up with an asset that has no value. Borrowers are also more challenging to deal with, and if there are violations from the county on the property these get passed to you (which you can try and collect from the borrower but if they walk they stick to the property which ends up being paid by you).

Every person has a varying level of experience and risk so no one fits into a one size fits all, but people should be aware of the risks they are engaging in when investing in certain asset classes. 

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Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
7y

I I personally do not invest in land contracts nor does either of the funds that I run. The bottom line reason is that as a land contract holder you are the owner of the property and responsible at the end of the day for any liabilities on that property. 

Our business model is to become the bank and hold paper -- not own assets and essentially become glorified landlords with a borrower who may or may not pay off the contract while in the meantime who may or may not create more liabilities for myself or my companies. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    my issue is you have someone you cant control still in title. if they get in a mess with IRS or some other issue next thing you know you have a buggered up title. 

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  • Liz Brumer-Smith
    Specialist · St. Petersburg, FL · Member since 2013 · 114 posts · 49 votes
    7y

    Great topic! I think everything you mentioned @Chris Seveney about the risks with value, condition, borrower difficulties, and potential lien/title issues nailed it. 

    I've been investing in CFD's for about 2 years now and had some out of the park home runs - I'm taking like 300% return on my money and some I've lost on because when we took the property back it was in such bad condition. We've rehabbed some and put a tenant in place, rehabbed some and created a new CFD on the backend. The cool thing is most of the time there is an alternative exit strategy that will still lead to profitability in the long run.

    I do definitely suggest proceeding with caution, but if you know what to look for and know your value threshold you should typically end up with decent deals!

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    7y

    I have created my own land contracts to sell with owner financing. I am just holding the paper and the buyers are responsible for every thing.

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  • Bob Malecki
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    7y

    I I personally do not invest in land contracts nor does either of the funds that I run. The bottom line reason is that as a land contract holder you are the owner of the property and responsible at the end of the day for any liabilities on that property. 

    Our business model is to become the bank and hold paper -- not own assets and essentially become glorified landlords with a borrower who may or may not pay off the contract while in the meantime who may or may not create more liabilities for myself or my companies. 

    4Reply
  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    I have a love hate relationship with Land Contracts. In most instances, the borrowers are hard working citizens doing all they can to make ends meet and make their payments. However In some cases the borrowers take total advantage of the fact that they can treat this like a traditional mortgage where they can skip payments for months and months with no repercussions.  And unlike skipping rent where they can get evicted immediately, they drag it out by signing trial payments plans, forbearance agreements and loan mods, make one payment then stop paying again, delaying the process even longer. 

    And as everyone mentions above, 95% of the time, the property is generally a total nightmare. 

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  • Bryan HartlenPro Member
    Investor · Phoenix, AZ · Member since 2018 · 315 posts · 157 votes
    7y

    My partners and I are relatively new to notes but have invested in both CFDs and mortgages.  CFDs certainly have the risks mentioned above (receiving our first violation from the city for unkept property was fun) but we believe that with proper selection there are ways to mitigate the risk.  Going forward we expect to continue to buy CFDs, but will do so only in jurisdictions where ejectment is closer to an eviction than a foreclosure.  We’re working on understanding where these markets are BEFORE buying CFDs.  Given that some investors won’t buy CFDs there’s also greater opportunity in that space.

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  • Guillermo Perez Vargas
    Investor · Scottsdale, AZ · Member since 2009 · 23 posts · 5 votes
    7y

    Hi,

    Being relatively new to this type of investment (2 yrs). I personally hold 5 CFD's with values in the low 30's but valuations in excess of 70K on each property.

    The reason i like the CFD's are that in the event of default, as a general rule, you don't have to foreclose, just evict which is much lower cost and more important to me faster.

    If the borrower defaults and I have to foreclose, I can turn around and sell the property again at an updated price.

    Since i only paid in the high teens for each of the notes, the downside is something I can live with.

    BTW, all notes are fully performing and I'm getting an average yield of 28-32% and have about 250 payments left.

    Final comment. With respect to liability and other similar issues, Notes are in the name of a Personal Property Trust, with the benificiary being a WY LLC. This mitigates in my mind some of the down-side of the CFD's

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  • Chris SeveneyBusiness Member
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    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    7y

    @Guillermo Perez Vargas

    Why would having them in a personal property trust mitigate any risks?

    I have always been told trusts can keep your name hidden but do not act in any way as asset protection.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Chris Seveney

    I used to, back oh 35-40 years ago. LOL

    I don’t because they’re rare on commercial property. But we just did something which has some similarity. Basic are we purchased two tracts of land vitally located in middle of a large commercial development for $2.5 million. The “seller” will buy back these two tracks with the proceeds of MUD bonds he sold to reimburse himself for advancing $8 million for utilities improvements. He has seven months to repurchase the tracts for $2.891 million,, providing us with a 15.6 % return in 7 months, or almost 27% on an annual basis. If not redeemed in 7 months he has a 3 month extension with price increase of 1% per month , AND the transfer of a small amount of equity to us in his development projects, which include a profitable 280 space RV park and a 60 unit new Marriot Motel.

    Should he not redeem, we end up with ownership of the two tracts with appraised value of $7.4 million.

    I’ll let you know how it goes. I believe with the yield available from purchasing performing notes generally being below our target, and with the risk and pricing too high for most non performing offered, and so many hard money lenders originating in single digit interest rates, that we needed to get creative to invest our money for our portfolio to yield our targeted return, without increasing our risk.

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  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    You can make a lot of money on Contracts For Deed, but I generally find the whole process to be ethically / morally questionable for me.

    I realize there are different Sellers and all situations are different, but a lot of what I see are Sellers who take a large down payment from someone who they know has virtually no chance of ever paying off the property.

    They wind taking the property back the first time someone misses a payment and then they start the process all over again. That's not how I wish to make a living.

    Your mileage may vary ....

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Don Konipol:

    @Chris Seveney

    I used to, back oh 35-40 years ago. LOL

    I don’t because they’re rare on commercial property. But we just did something which has some similarity. Basic are we purchased two tracts of land vitally located in middle of a large commercial development for $2.5 million. The “seller” will buy back these two tracks with the proceeds of MUD bonds he sold to reimburse himself for advancing $8 million for utilities improvements. He has seven months to repurchase the tracts for $2.891 million,, providing us with a 15.6 % return in 7 months, or almost 27% on an annual basis. If not redeemed in 7 months he has a 3 month extension with price increase of 1% per month , AND the transfer of a small amount of equity to us in his development projects, which include a profitable 280 space RV park and a 60 unit new Marriot Motel.

    Should he not redeem, we end up with ownership of the two tracts with appraised value of $7.4 million.

    I’ll let you know how it goes. I believe with the yield available from purchasing performing notes generally being below our target, and with the risk and pricing too high for most non performing offered, and so many hard money lenders originating in single digit interest rates, that we needed to get creative to invest our money for our portfolio to yield our targeted return, without increasing our risk.

    Yup some of my best deals are as lender with a participation component.. Especially with smaller developers who find it hard to find bank money..  In Oregon there is no mechanism for private developers to float bonds to pay for infrastructure.. its one reason why Oregon never grew as fast as say CA .. and other areas..  you can have a great property. but the Sewer main line is 2 miles away and you need a pump station or two.. this is where bonds are perfect.. and were in our state it stymies growth since you cant front end load the project with that much offsite.. you do get some SDC credits but you got to have the big money up front to do it then wait to get paid back with no interest.   We used bonds exclusively in CA to build out larger projects IE 200 to 500 lot communities.  They are expensive to put together and will take most cities a year or two to get it done.. but once established thats your take out for the loan you get to put everything in.. bank will step in at that point once the bonds are approved.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Stanley Bronstein:

    You can make a lot of money on Contracts For Deed, but I generally find the whole process to be ethically / morally questionable for me.

    I realize there are different Sellers and all situations are different, but a lot of what I see are Sellers who take a large down payment from someone who they know has virtually no chance of ever paying off the property.

    They wind taking the property back the first time someone misses a payment and then they start the process all over again. That's not how I wish to make a living.

    Your mileage may vary ....

    this is rampant in the subprime markets .. were seller carry back is just a glorified rental.. and very very common in TEXAS with non english speaking.. from what i have seen.. or in other areas with credit challenged or income challenged folks. Many have their whole business model  as this.. knowing full well that 90% of the homes will never pay off.

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  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Jay Hinrichs Exactly. My best friend in Louisiana has someone who wanted to teach him how to do exactly what you're describing. My friend told him thank you, but no thank you.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Stanley Bronstein  

    @Jay Hinrichs

    Ten years ago Texas changed CD law so it eliminates almost all the abuses, but still maintains the essential element of allowing people unqualified for financing to purchase a property.

    The law that accomplishes all of this is astonishingly simple.  When the buyer of a property on a contract for deed obtains a provable 20% equity position in the property, he must be provided a warranty deed in his name.  In exchange, he signs a new note and deed of trust with the exact same terms as what is remaining on the CD.

    Btw, speaking only Spanish in most of Texas is no disadvantage when it comes to buying real property as every title company has Spanish speaking personnel and every major real estate and mortgage broker does as well.  Many real estate attorneys are bi lingual.  The Spanish speaking people in Texas being taken advantage of are a myth created by the “liberal” politicians looking to secure “ethnic” votes to push their socialistic agenda.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Don Konipol:

    @Stanley Bronstein  

    @Jay Hinrichs

    Ten years ago Texas changed CD law so it eliminates almost all the abuses, but still maintains the essential element of allowing people unqualified for financing to purchase a property.

    The law that accomplishes all of this is astonishingly simple.  When the buyer of a property on a contract for deed obtains a provable 20% equity position in the property, he must be provided a warranty deed in his name.  In exchange, he signs a new note and deed of trust with the exact same terms as what is remaining on the CD.

    Btw, speaking only Spanish in most of Texas is no disadvantage when it comes to buying real property as every title company has Spanish speaking personnel and every major real estate and mortgage broker does as well.  Many real estate attorneys are bi lingual.  The Spanish speaking people in Texas being taken advantage of are a myth created by the “liberal” politicians looking to secure “ethnic” votes to push their socialistic agenda.

    well that's a good law..  what I have seen in the low value assets though is the seller jack the price up way above market and the buyer will have a hard time proving 20% equity when they paid 40% to much for it in the first place..    

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  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Don Konipol Unfortunately my mileage is different than yours ... What you say is a myth, I tend to see in reality. Yes, the Texas law is much better than it used to be - no doubt about that. You speak of Spanish speaking personnel in title companies. Yes that is true, provided the transaction ever makes it to a title company in the first place. Unfortunately, many transactions never make it there.

    It's much better than it used to be, but there is still plenty of opportunity out there that I (and my clients) choose to not pursue.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Stanley Bronstein, My myth is based on 40 years investing my own money, NOT getting paid whether I’m right or wrong.  Those who can do, those who can’t broker or advise

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  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y
    0Reply
  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Don Konipol:

    @Stanley Bronstein  

    @Jay Hinrichs

    Ten years ago Texas changed CD law so it eliminates almost all the abuses, but still maintains the essential element of allowing people unqualified for financing to purchase a property.

    The law that accomplishes all of this is astonishingly simple.  When the buyer of a property on a contract for deed obtains a provable 20% equity position in the property, he must be provided a warranty deed in his name.  In exchange, he signs a new note and deed of trust with the exact same terms as what is remaining on the CD.

    Btw, speaking only Spanish in most of Texas is no disadvantage when it comes to buying real property as every title company has Spanish speaking personnel and every major real estate and mortgage broker does as well.  Many real estate attorneys are bi lingual.  The Spanish speaking people in Texas being taken advantage of are a myth created by the “liberal” politicians looking to secure “ethnic” votes to push their socialistic agenda.

     The 20% equity rule on Land Contracts is also the law in Ohio and Indiana, and quickly becoming the de facto precedence in many other states as well. 

    2Reply
  • Guillermo Perez Vargas
    Investor · Scottsdale, AZ · Member since 2009 · 23 posts · 5 votes
    7y
    Originally posted by @Chris Seveney:

    @Guillermo Perez Vargas

    Why would having them in a personal property trust mitigate any risks?

    I have always been told trusts can keep your name hidden but do not act in any way as asset protection.

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  • Guillermo Perez Vargas
    Investor · Scottsdale, AZ · Member since 2009 · 23 posts · 5 votes
    7y

    Guess I did not explain it well enough. The Trust is not for asset protection, however the overall structure of Trust and LLC mitigates the down side (not just the risks). In my mind, risk involves possible loss of principal, down-side involves the hassle of work that I will need to do to to protect investment. Foreclosure is a downside if the LTV is adequate, inadequate LTV is a risk. I selected this structure after reading about it BP and Paper Source, and also being mentioned by multiple "gurus", and since it made sense to me, It seemed as the best way to structure the ownership of my Notes.

    Having the CFD in the name of a trust with beneficiary being a LLC, allows for a more efficient process to take back the property if Borrower is unwilling to correct the issue (the 20% rule not withstanding). Additionally, it is my understanding that some states require that property in that state, held by an LLC, require the LLC be in that state. With title being in the name of the Trust, this is not an issue. Finally sale of the Note, is much simpler if in a trust. No need for Title Company. And yes, I also like the idea of my name not being easily discovered as the owner of the note.

    The issues you mentioned about CFD being more work because Borrowers are not as financially strong, I totally agree. However the issue is the qualification of the borrower, not the CFD structure itself. A trust-deed with a marginal borrower can also be a problem, and the foreclosure solution is more time consuming and costly. The issue of fines by county, are definitely an issue inherent to CFD's. All my notes are in Michigan, and I'm listed in the county records as either the "Lender" or "Title Holder" depending of the county, but in any case I get notifications of any issues, and can make sure borrower corrects the issue.

    As I mentioned initially, I'm relatively new to this. I bought my first note in Mid 2018, and definitely have much still to learn, so I really appreciate it when the people with more experience correct any errors I may post. Thank you! :-)

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Stanley Bronstein:

    @Don Konipol Unfortunately my mileage is different than yours ... What you say is a myth, I tend to see in reality. Yes, the Texas law is much better than it used to be - no doubt about that. You speak of Spanish speaking personnel in title companies. Yes that is true, provided the transaction ever makes it to a title company in the first place. Unfortunately, many transactions never make it there.

    It's much better than it used to be, but there is still plenty of opportunity out there that I (and my clients) choose to not pursue.

     How about bi lingual attorneys?? Nowhere have I met that many Spanish speakers--I only speak Mandarin Chinese.

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  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Ronald Rohde Many in the general public are bilingual these days, but because of the language barriers, there is a greater possibility of some sectors of the general public being preyed upon.

    However, as was suggested earlier in this thread, I don't the problem is nearly as big in Texas as it used to be.

    I've run into it from time to time here in Arizona and I know several years ago I talked with the AZ Dept of Real Estate about my experiences with one licensee who they said had a known history of preying upon the Hispanic sector of the population in the Phoenix area

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  • Jay Johnson
    Specialist · Nashville, TN · Member since 2014 · 24 posts · 0 votes
    7y

    Guillermo:

    Thank you for pointing out the differences with several items.

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  • Jerel Ehlert
    Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
    7y

    From a Texas lawyer's perspective, I've read and re-read the pertinent statutes on CFD. If that was my only commitment, I doubt I could 100% comply with all state and federal laws and rules. Besides, the day after signing a CFD any buyer can record it as a deed with vendor's lien, so the seller might as well sell on a straight note/lien. At least then you could do a non-judicial foreclosure.

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