When to use land contract vs subject to

6 Replies

can anyone tell me why I would use a land contract for houses I will wholesale/flip to someone else, versus using subject to for houses I will hold myself? is it because it is more enticing to the seller for land contract but if i buy it for myself i would want it subject to have more control? so confusing! Thanks!

Originally posted by @Steven Pearce :

can anyone tell me why I would use a land contract for houses I will wholesale/flip to someone else, versus using subject to for houses I will hold myself? is it because it is more enticing to the seller for land contract but if i buy it for myself i would want it subject to have more control? so confusing! Thanks!

 Big difference between the two.

Subject To: You are getting title to the property, loan stays in seller's name, seller is dependent upon you to make the monthly payment to the bank or you trash their credit. Seller has no recourse if you fail to pay. They can't foreclose. Among other things. (you can be investigated for mortgage fraud if you fail to pay but that is up the the FBI)

Land Contract: If the seller won't do a Subject To you can use a Land Contract. You and the seller have a mortgage agreement. You are making payments to the seller. You don't get full title until the loan is paid off. Seller can foreclose. Among other things. (you should use a loan servicer to make sure everybody gets paid properly and timely)

I don't wholesale so I can 't help you there but I use Subject To to buy and I use Lease Option to sell except in Texas where I use Wraps. (Similar to Land Contract but you get title immediately).

Originally posted by @Steven Pearce :

can anyone tell me why I would use a land contract for houses I will wholesale/flip to someone else, versus using subject to for houses I will hold myself? is it because it is more enticing to the seller for land contract but if i buy it for myself i would want it subject to have more control? so confusing! Thanks!

Subject to is taking title to a property while leaving the original mortgage in place and the new buyer/ title holder will need to continue to make payments to the lender leaving the mortgage holder/seller at risk with no recourse in the event of a default. You can assign these contracts (wholesale) in some states but this strategy requires serious expertise. This technique of transferring title without paying off the loan will put the loan in technical default and trigger the due on sale clause so the lender can call the loan and require full payment if they find out. There are very specific laws and contracts for this strategy in Texas so you should speak to an attorney before you try this.

A Land contract is owner financing and generally used when a property is owned free and clear and note and deed of trust are created in the name of the buyer like a traditional mortgage. You can wholesale these deals as well and these are better as the owner still has recourse in the event of a default.


 

@Greg Dickerson much appreciated! We hired a real estate attorney and our title company deals with investors, im looking at a few courses to better educate myself. So far we have been doing fix and flips through our marketing campaigns (4 in 2019!) but want to add wholesaling starting jan 1. Thanks again for all the information.

In Texas, it is highly advised to NEVER use "land contract" (aka, contract for deed) or lease/option.  These are executory contracts and highly regulated under Chapter 5 of the Texas Property Code.  If there is a consumer on the receiving end, the consensus against using executory contracts goes double.
Use a lawyer familiar to draft sub-2 papers and title company that knows the difference.

@Greg Dickerson

Actually, a deed of trust is NOT used in a land contract, also known as a contract for deed.

The whole theory behind the land contract is that while “equitable” title to the property passes from the seller to the buyer, “legal” title remains with the seller. If a mortgage or deed of trust were used, then legal title would pass which negates the purpose of using a land contract.

Further, the use of a land contract is no way dependent on there being an existing loan. The land contract is used so that if a seller sells with a small down payment, and carries back a note, he won’t have to go through a formal foreclosure in the event of default, which can be years in some judicial foreclosure states.

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