Seller financing, Land Contract vs Installment? - Posted by Adam (BatPro)


#1

Posted by Redline on October 28, 1998 at 11:41:33:

Eduardo -

Excellent advice - thanks for explaining it so even I could understand! :wink:


#2

Seller financing, Land Contract vs Installment? - Posted by Adam (BatPro)

Posted by Adam (BatPro) on October 27, 1998 at 08:50:56:

I am going to have a meeting with an owner of a duplex. Seller owns free and clear. I told him on the phone that I would give $1000 as a down payment and then I asked him to carry a 1st on the remaining. However, I confused as to how to set up this owner financing legally. Purchase price $76,000.

  1. Do I just write on the offer to purchase? “owner will carry financing at 7% interest for 25 years.” Ok who will figure out the payments and such? A title company? a real estate attorney? I need some specifics here about how to go about this. The seller asked if that type of sale was legal! Both of us are unsure as to how to go about setting up the paper work.

  2. I am wondering if I will get the title or will the property to be mine to do what I want with? i.e., sell it for profit or rent it for a few years.

Thanks for help in advance

Adam


#3

Re: Seller financing - Posted by John

Posted by John on October 29, 1998 at 03:28:43:

I have just read the twenty or so follow-up postings to your questions,and I don’t know how you could not be confused by all that advice.

Some of the material presented as “fact” in those postings, although well intentioned, is not true. Some varies by state. Some of the attitudes based on that material are consequently wrong.

There’s way too much to discuss point-by-point, but I couldn’t let you go into this deal without adding my thoughts.

Bud, Jimbob, and John’s advice up-top is great, except delete Jimbob’s sentence: “The unpaid principle balance of first deed of trust shall become entirely due and payable 15 years from the date of closing.” Don’t put it back in unless the seller requires it.

Forget the Land Contract and Lease/Option discussion for now. They are both excellent methods to buy and sell properties, which I have used and will continue to use myself, but are not the best method in this case, mainly because there is no underlying loan. Those are two ways (but not even the best way) to buy properties with underlying loans containing due-on-sale clauses, and they have their own limitations.

Finally, find a knowledgeable REAL ESTATE attorney to help you with this deal. I think that your being new at this would make the cost worthwhile. Be careful though. A non-real estate lawyer could do you more harm than good. A local real estate investment association can probably help locate one. Good luck - you’ll be OK.


#4

No need for AITD - Posted by Bud Branstetter

Posted by Bud Branstetter on October 27, 1998 at 20:50:39:

An All Inclusive Trust Deed acknowledges that there is underlying indebtedness. A straight Deed of Trust or Mortgage and Note is what is appropriate when the property is free and clear. There are a number of clauses like John specified that you try to get in when doing seller financing. Besides substitution and subordination I ask for the right to pay off the loan at a 10% discount during the first 12(or agreed number) months.

Personally, I like to amortize for 30 years because the paid amount will triple over the sales price. I hold in the IRA and will use for retirement income. If I need money I can always sell part.

Be sure to negotiate what you can into that contract and the attorney will set up the paperwork.

Here are a couple of examples:

The note and mortgage shall provide for a thirty day grace period in
the event of default, and any reason for default may be cured during
that period, shall provide for right of prepayment in whole or in part
without penalty, and shall be assumable with sellers consent, such
consent will not be unreasonably withheld.

The note and mortgage may not be sold, assigned, hypothecated, pledged
or otherwise conveyed without giving the maker written notice of the
price and terms of the proposed transaction and all costs and
commissions. The maker shall have the first right of refusal to
purchase the note and mortgage for the same price and terms, and shall
have 60 days to obtain the funds.

Subject to sellers consent, such consent not to be unreasonably
withheld, Buyer may substitute collateral for this note and mortgage,
with any real property in which the borrower can demonstrate equal or
greater equity or with obligations of the United States of America of
equal or greater value than the property mortgaged herewith, in which
event the lender shall properly execute a satisfaction of the prior
mortgage. Questions of value shall be determined by a Certified
Appraiser or CCIM mutually agreeable to the parties.

The terms of the note may changed at any time upon mutual agreement of
the parties.


#5

Re: Seller financing, - Posted by Jimbob

Posted by Jimbob on October 27, 1998 at 11:22:21:

Adam,

If you live in a mortgage state, you may need to get an attorney involved.

If you live in a Deed State, it is legal to do this, but you’ll still want an attorney involved for protection and correctness. Here’s a rough idea of how you could go about it.

Purchase Price is $76,000
Downpayment is $1,000

Seller agrees to finance the balance of the purchase price in the form of an All Inclusive First Deed of Trust @ 7%APR, amortized over 30 years, with monthly payments due to the seller on the ____ day of each month in the amount of __________, or more, including principle and interest. The unpaid principle balance of first deed of trust shall become entirely due and payable 15 years from the date of closing.

Things to ask for:
Make the first deed of trust assumable to another buyer. (non-qualifying would be ideal)
No pre-payment penalty on the first deed of trust.

Chances are the Title or Escrow company will figure out the payment schedule for you on the first deed of trust, but you and the seller will want to know who gets what. You can find mortgage calculators on the web, when you find one, enter in a bunch of different payment scenarios so you can at least get an idea of what the monthly payment could be.

Jimbob


#6

Re: Seller financing, Land Contract ? - Posted by KE

Posted by KE on October 27, 1998 at 10:50:14:

I know a bit about this because we just paid off a 10 year Contract for Deed and got title to the property

You’d be doing I Contract for Deed, or Land Contract. (An actual document) You would pre-determine a amount of years for the loan ie, 7% interest @ 25 year term. You can figure out the payments and get an amortization schedule (interest & principle applied each month) on the internet. Check out www.interest.com/calculators.html

The Land Contract would be recorded, but you wouldn’t actually get title until paid. You could possibly sell or sublease/ it if you put in as buyers “John Doe and/or nominees”

It’s perfectly legal. I would definetely get an attorney or title company to handle the paperwork and closing.

A few things to think about and issues to address with seller/attorney: have the seller sign a warranty deed and keep it in escrow (with attorney for example) so that if he dies you will not have such a problem). RECORD the Deed contract so you have legal right in case of his death, bankruptcy, liens against the property etc. These issues should be discussed. Also, who gets proceeds of insurance company payoffs in case the building is destroyed by fire, etc. The policy would cover the owner, who is the seller until payed off, but you should address the issue so that you would get your equity out of it, at least. Something we didn’t do, but I now know we should have, is have a title search done to be sure the buyer actually has clear title to the property. All people who have an interest in the property must sign the deed. We didn’t know enough to do ANY of these things, but luckily all went well so far.

The owner did die a few years prior to payoff, but her heirs’ attorney processed the final paperwork to issue the title abstract to us. We now have the title abstract, though the title wasn’t actually updated yet, so we may still face problems. I generally isn’t updated until you need it to sell, use for equity, etc., because it’s a cost of about $150 and it’d have to be done again anyway when you did want to use it.

We’ll be trying to use it for an equity loan soon, so we’ll find out then.

There should be no problem.


#7

Mortgage clauses - Posted by Bob

Posted by Bob on November 18, 1998 at 12:48:10:

Bud Branstetter posted this a couple of weeks ago regarding clauses on should get in a mortgage if possible:

“The note and mortgage shall provide for a thirty day grace period in
the event of default, and any reason for default may be cured during
that period”

I think I understand the first part, but what does ‘any reason for the default may be cured’ mean?

Thanks,

Bob


#8

Frustrate the note buyers - Posted by John Behle

Posted by John Behle on October 27, 1998 at 19:54:16:

Make sure there is a clause that states that if the seller ever goes to sell the note, he must offer it to you first at the same terms he has a bonified offer on.

This is called a “First Right of Refusal” clause. It is real nice, because that way you have the option of paying your note off in the future at a large discount. The last thing you want to find out is that it sold and you didn’t even know it.

I have a friend that had an $80,000 note on a motel. He found out after it had sold that it sold for $36,000. He would have loved to save himself $44,000, but didn’t have the chance.


#9

Re: Seller financing, - Posted by Adam

Posted by Adam on October 27, 1998 at 12:23:02:

Ok, Jimbob,

This above explanation looks good, however I have 2 questions.

You mention 7% over 30 years, then you mention The unpaid principle balance of first deed of trust shall become entirely due and payable 15 years from the date of closing. Why do you say 30 years then turn around and say it must be paid off in 15 years???

And, What is non-qualifying referring to?


#10

Re: Seller financing, Land Contract ? - Posted by Eduardo (OR)

Posted by Eduardo (OR) on October 27, 1998 at 12:53:43:

Guys and gals–

Never, ever, under any circumstances, use a “contract for a deed,” a “land sale contract,” or any other name for an installment sale if you are the buyer. You do not get title to the property until it is paid off. All the benefits peculiar to this kind of sale benefit the seller and none benefit the buyer. For example, in my state you can forfeit the property if you miss payments without going thru foreclosure. Always use a deed of trust (or all-inclusive deed of trust) or a mortgage (in non-deed of trust states). Then you get title right away. Remember–anything you can write into a contract for a deed, you can write into an addendum for a trust deed (a lot of people don’t know this). But you can’t put certain legal protections for the buyer in a contract for a deed. In fact, if a seller wants to use a contract for a deed instead of another type of conveyance, and you are the buyer, consider it a “red flag,” he may be trying to hide something. --Eduardo


#11

Re: Seller financing, - Posted by Jimbob

Posted by Jimbob on October 27, 1998 at 14:25:32:

Adam,

The reason is, you want to amortize your payments over the longest period of time possible, that keeps your payments low. I said the unpaid balance would be due in 15 years because almost nobody will privately finance the property for the full 30 years. By doing this the seller receives interest over 15 years, and you would have paid down the principle balance by about 1/3 to 1/2 then you could refinance the property and cash him out. Chances are very good you’ll never even own the property for 15 years.

Non qualifying is referring to if you get into a jam sometime down the road, by making the deed of trust assumable to another buyer, hopefully without qualifying, you could advertise the property for sale and say $85,000, $10,000 down and assume balance (no-qualifying). I guarantee people will beat down your door trying to take that deal off your hands. Would you call on an add like that?

What you’re doing is providing yourself an exit strategy in case you get into trouble, always think about an exit strategy when buying property.

Make sense?

Jimbob


#12

Re: Seller financing, Land Contract ? - Posted by KE

Posted by KE on October 27, 1998 at 19:49:53:

Thanks for setting straight. C/D’s are done all the time around here, up north. Never heard of or saw a “deed to trust” sale. Have, however, heard of the term "all inclusive deed of trust. Think it had something to do with the wording on a C/D. Sure learning a lot from this board!


#13

Re: Seller financing, Land Contract ? - Posted by Jimbob

Posted by Jimbob on October 27, 1998 at 14:32:38:

Good points Eduardo,

Isn’t a lease/option in a sense of the word sort of like a contract for deed? If so, why are there so many benefits to that as opposed to the contract for deed?

Jimbob


#14

Re: Seller financing, - Posted by John

Posted by John on October 29, 1998 at 01:46:32:

I would never offer a seller a 15 year balloon unless he brought it up first. Why make restrictions for yourself?

It would be interesting to learn what value various restrictions have on the exchange values of notes.


#15

Re: Seller financing, Land Contract ? - Posted by Eduardo (OR)

Posted by Eduardo (OR) on October 27, 1998 at 17:57:40:

Jimbob–

I don’t view them as being similar at all. A contract for a deed (land sale contract, etc.) is an installment sale pure and simple. You don’t “own” the property until it’s paid for even tho you might have possession. In order to “own” it you MUST make payments for years until it’s completely paid off–sort of like “rent-to-own” with contractually required payments and no choice on your part whether to back out of deal or not.

A lease-option is a an OPTION to purchase, you can exercise it or not after a relatively short period. You’re not locked into long time payments. You usually have possession until option is (or isn’t) exercised. Options are a different class of instrument than installment contracts (or trust deeds and mortgages). Having title (“the union of all elements which constitute proof of ownership”–definition) up-front is better than waiting 30 years to get it is why trust deeds and mortgages are better. --Eduardo