Posted by LeonNC on May 02, 2000 at 10:52:01:
I understand the difference between an AITD and Land Contract but it seems that the same problems can occur with both when buying. I know it depends on the seller but I’d just like to know if there is a way to buy using the Land Contract or AITD and minimizing risk. Is the seller not making the payments my foremost risk? It seems like making the payments directly would solve that problem and having the property in the land trust would shield the seller from other problems.
I do understand that buying “subject to” is preferrable because you get the deed and the title without the liability of the loan. If the payemts ARE being made I’m not sure what the advantage is though. Is the advantage that you have more to offer YOUR buyer?
If the property is bought on a wrap and is in a trust with the payments being made directly, and not by the seller, where is the risk?
LeonNC
Buy on land contract? - Posted by LeonNC
Posted by LeonNC on May 01, 2000 at 01:36:20:
I’ve been talking with a guy who I origanally made a lease option offer to. Now I’m thinking to buy on a land contract and sell on a land contract might work better. He doesn’t want to be an out of state landlord so I mentioned buying it on a land contract and we’ll probably talk somemore this week. The house is in a good neighborhood. It’s a 1972 4/2.5, 1995sqft in good shape. Hardwood floors no carpeting.
Here’s the numbers:
FMV is $122k.
He has a VA 1st of $86k and a 2nd of $29k totaling $115k.
His payment PITI totals $1210.00 a month and I would mirror that payment and give him the loan balance.
I told him I needed $3k from him because HE mentioned he might be willing!
I’m thinking I can sell it on a land contract as follows:
Sale price $128k.
5% downpayment at $6400.
Monthly payments of $1158 PI + $185 TI = $1343.00 mo. @11% interest with a two year balloon.
It looks to me like $9400.00 upfront with a $133.00 a month cashflow and $6600.00 on the backend.
I know the VA loan is ok with the land contract but the second may not be. I would have the owner put it in a land trust and have the trustee sell it to my corporation.
What do you think?
LeonNC
Re: Buy on land contract? - Posted by Eduardo (OR)
Posted by Eduardo (OR) on May 02, 2000 at 24:28:00:
Leon–
The rule is: NEVER BUY on a land sale contract! Why would anyone want to do this when you can get more simply by buying on a note and trust deed (or AITD) or note and mortgage (or wraparound mortgage). Anything you can put into a land sale contract (in the way of terms, conditions, etc.) you can put into a TD or mortgage (just write it in an addendum). In some states, TD’s and mortgages are done by preprinted “standardized” forms, but lawyers do land sale contracts. The lawyers, not wanting to lose business, will tell you their “boilerplate” specials are better than the use of forms. This is nonsense–you can customize the form just as you can a land sale contract providing it has the essential ingredients. Remember, with a land sale contract, you don’t “own” the property (get title to it) until you have paid off the contract. It’s like an installment sale contract. With a mortgage or TD you get title right away when you close the transaction even if you still owe money. There are other differences–all in favor of buying with a TD or mortgage. (Note that, although some states are lien theory states and some are title theory states, all states recognize the mortgagor as the legal owner of the property–not so with the buyer on a land sale contract who merely has equitable title [title to the extent of what he has paid]). People buy on a TD or AITD or mortgage or wraparound mortgage all the time and sell on land sale contracts (contracts for a deed, installment sales). It is okay to SELL on a land sale contract. --Eduardo
I really need some help on this one (nt) - Posted by LeonNC
Posted by LeonNC on May 01, 2000 at 01:40:07:
nt
Re: Yes you do… - Posted by Ed Copp (OH)
Posted by Ed Copp (OH) on May 01, 2000 at 09:20:57:
Leon-Leon-Leon,
What you are talking about doing has the potential of being a “lawyer get rich quick” mouse maze game. It may look good on paper but…
You have some good ideas here, unfortunately the double land contract is not one of them.
Why not take title (the deed) subject to all of the underlying mortgages, by using the land trust that you mentioned (elimination the first land contract that you mentioned). Then you might have something that is sellable.
In the example you use in your post consider that the present owner might have some problems now or sometime in the life of the land contract, such as credit collections, judgements, ex-spouse (s), and so on. Now consider that you could also have problems like that at some point in the life of this first land contract. Then you want to sell to another buyer on a land contract, and this might be fine for someone who had the downpayment that you mentioned ($6,000+) and had limited knowledge about real estate. Consider what happens if the new buyer wants a title search, and a performance mortgage going in. Since you are looking to step completely out of the picture as far as liability goes, and only take the profit; I would not think that a Land Contract would be the way to get the job done. Especially since the original seller will NOT be released from his liability, and considering that the V.A. is involved (with a sizable legal team).
I am here to tell you that if the original seller defaults in his V.A. loan at any time in the future that your buyer will loose his house. (read period).
Now you may be able to escape liability in this case, but I would not want to go through the aggrivation that might be involved here (personal footnote read again)…ED
But, but, but… - Posted by LeonNC
Posted by LeonNC on May 01, 2000 at 11:37:18:
Hi Ed and thanks for your post. I was expecting to hear something in the neighborhood of what you said. The reason I went ahead and asked anyway was because it is a technique I got from one of Bronchick’s courses! He says he only teaches what he does.
Anyway, I was going to email you but I figured I’d go ahead and put the whole thing here on record for others to refer to. I’m not sure of your exerience but mine is limited. I’ve gone through a lot of courses and even done a few deals. I feel like I’ve actually graduated kindergarten in the REI arena. I assume your suggestion of my orignal post is to buy “subject to” and sell the beneficial interest. I know this is what is being taught in the courses but I would like to hear what you and others are really doing to SELL these and be out of it. I mean do people really give you $5-$10k for the beneficial interest in a trust? I know some people prefer to L/O the house to avoid tax issues, stay in control, get every dime they can out of the house, and not abandon the seller and buyer, but the one I’m looking at just wouldn’t work that way.
I’m trying to FOCUS on lease options right now but I’m not going to pass on something just because it doesn’t fit the mold. If buying on a land contract is too risky then I’ll just pass on that technique. If I can buy it subject to I would consider it too. But, if you can’t lease option the thing on the backend, just how saleable is it? And how do you do it to minimize your risk? Thanks.
LeonNC
Re: But, but, but… - Posted by Ed Copp (OH)
Posted by Ed Copp (OH) on May 01, 2000 at 13:56:58:
Leon,
I have had a lot of experiences that were painful financially. Most of them were my fault, and avoidable. There are several areas that I take special care to protect myself in. Anything to do with the federal government is at the top of my list. IRS and the VA being right up at the top of the list. Also I am a real estate broker in OH, so I try not to get the division of real estate involved in any of my transactions. I just do not care to take the time to fix a mess if I can avoid it going in.
Now all that stuff being said, I find nothing wrong with the meterials presented by Bill Bronchick. I have not taken his courses but I have read a lot of his meterial on his site and this one, in my opinion it is sound.
In the matter that we were discussing, I would say yes buy it subject to, if the rest of the deal makes good sense. Since there is a second motrgage on the property be careful not to pay too much going in. If it was my deal I would want to place myself in the position of making the underlying mortgage payments, or at lease being able to control the flow of payments. If you buy L/C and the seller has the responsibility of making the payments, what do you do if for some reason he stops sending in the payments. What if he keeps the second mortgage current, and stops paying on the first (VA insured)? There are many things that could happen to mess things up.
Now if you buy subject to and sell on a L/C I would think that this would offer a pretty desirable position for you, especially if you could use a balloon to get the new buyer refinance and pay off the old loans.
You asked about the folks who will pay 5-10K for your beneficial interest. Well they are out there but they are not necessarily advertising. Often they have cash in a safety deposit box, or a coffee can, or an old sock, etc. Frequently they do not have a visible job. Often they are going to be good buyers, down the road when they get a problem behind them. There are a lot of reasons that someone will do business this way, many are quite legitimate and some are best not discussed. Usually this results in good business transactions, especially if we do not make any mistakes going in. Just take reasonable care and try not to overcomplicate things. Buy low and sell high. Hope this helps a little…ED