Buying on Land-Contract --- What do I need to know???

For the last year or so, I've been renting a shop. Actually, it's just a 2400 sq-ft pole-barn, but the way it's laid-out, with a little work it could be pretty much ideal for me.

A couple weeks ago, I got a voice-mail from the owner asking if I'd be interested in buying the property. Told him I was only interested in the shop and 1/2-acre beside it, not the house, pool, and other two acres. So he checked with the county, and splitting the property would be no problem. And he'd be fine with land-contract.

I have a number in my head, that would allow me to front-load the deal, with 50% down. This would make my monthly payment considerably less than I currently pay for the rent, and I could use that difference to finish installing the restroom, (water is already run), and re-do the electrical.

Found out today that the number in his head is 5k higher than mine, but that he's willing to pay the legal costs on both sides. The owner has been a great guy to deal with, and we're really not that far apart, so I'm pretty confident we can reach an agreement quickly.

The thing is, I have zero experience with land-contract, so I don't want to go into this flying blind... What type of things do I need to discuss with my lawyer? What potential pitfalls exist with this type of deal?

Basically, any input on covering my ass would be greatly appreciated!!!

Thanx,

Will

Generally, the seller sets the terms. So he could have a clause which states if you're late on 1 payment by x number of days, you forfeit the contract, he gets the property back, and you're out of luck.

It doesn't sound like that's his intention, but absolutely have the contract reviewed by a lawyer well-versed in real estate transactions.

I have sold a couple houses on land contract and had a real estate attorney write up the contracts. Both of my land contracts worked out great for me and the buyers. Conversly my brother bought a house on land contract and the person he was buying the house from went bankrupt and lost the house. My brother is out the $30,000 down payment he made and is now living in an apartment. If the property has a loan on it you need to make sure the bank knows it is being sold on land contract. I would recommend you talk to a real estate attorney and make sure all of your bases are covered, the seller should do the same but use different lawyers. One thing to watch is that land contracts usually have a higher interest rate, I know I charged a pretty hefty interest rate on the ones I sold that way. With the amount of down payment you have you may be able to get a favorable loan from a bank if they are creative. Though I am not a fan of lawyers in most cases this is one case I would use a lawyer for to prevent what happened to my brother and may happen to the two people my dad sold houses to on land contract (long story).

With 50% down, would traditional bank/mortgage financing be an easier route?
Seems the banks would be very happy when they see that amount of down money.
The seller would get all his money up front (which may encourage him to reduce his sale price) and you would not be financially tied to the seller (rather tied to the bank.)

I'm not sure I"d ever buy on land contract, sell yes, but the buyer has more chances to loose out than the seller.

grafmiata wrote: I was only interested in the shop and 1/2-acre beside it, not the house, pool, and other two acres.

No comment on the question regarding land purchase. Just commenting on this. By leaving this off, you are allowing for who knows whom to move in there, and then start complaining about your activities. Maybe it won't happen, but I've seen it happen many times.

You really might want to reconsider and perhaps purchase it all. You could become a landlord yourself, or maybe move here yourself and be able to play on cars in your own back yard.

Understand that on a contract for deed or land contract, the Seller owns the property UNTIL you have paid in full. Therefore anything that happens to him in the interim may have a drastic effect on your rights ie judgments, tax liens, divorces, etc. Get a competent real estate attorney involved and representing solely your interests in the contract negotiations. Make sure that the contract has clear dispute resolution clauses and good definitions and terms of default set forth. As stated above, you forfeit all payments including the front end money if the Seller declares a default so you need to protect yourself. Personally, I would not recommend paying any significant money up front. YMMV

I think you need to know this: "Don't Do It." I have never heard of one that ended well. I have heard of a lot that ended like dmyntti's brother's did.

JohnRW1621 wrote: With 50% down, would traditional bank/mortgage financing be an easier route? Seems the banks would be very happy when they see that amount of down money. The seller would get all his money up front (which may encourage him to reduce his sale price) and you would not be financially tied to the seller (rather tied to the bank.)

This is my thought exactly. I really don't see the point of a contract to deed unless a mortgage isn't available. And in this case (50% down), I don't see a mortgage not being available.

My comment is that the property isn't yours until you've paid it off. It's still his and your claim on it is no greater than a renter so if you miss even one itty bitty term like you're one day late due to the holidays and slow mail service he can evict you. There's no need for him to foreclose.

This is the method the original Rockefeller used this method to make a bundle. He'd sell the same property over & over again after finding some picayune term default or even just make up a default and evict the tenants. Their only option and your only option is to spend a lot of money & time in court.

What if the seller dies?

What if the seller goes crazy?

What if the seller gets a divorce?

What if he doesn't pay his taxes?

What if he goes to court on an unrelated subject and loses and they attach that property?

What if the seller uses that property as collateral for another loan? (he can, he owns it)

You don't have nearly the protect that a mortgage gives you.

You can file your claim against the property which would cause him some difficulties if he should throw you out and want to resell it in a traditional manner, but your claim can be set aside fairly easily - especially if you had a valid default on even the smallest term.

Many investors use this method to get a better class of renter in their properties (you think it's yours so you take better care of the property and even upgrade it).

mtn wrote: This is my thought exactly. I really don't see the point of a contract to deed unless a mortgage isn't available. And in this case (50% down), I don't see a mortgage not being available.

Then you haven't been paying attention to all the new rules & regs.

carguy123 wrote: Then you haven't been paying attention to all the new rules & regs.

??? What's so hard? We've just got a new mortgage, dead easy. If you have 50% down I can't imagine any issue if you've got a job, aren't crippled by debt and can afford the loan.

Double post

Adrian_Thompson wrote:

carguy123 wrote: Then you haven't been paying attention to all the new rules & regs.

??? What's so hard? We've just got a new mortgage, dead easy. If you have 50% down I can't imagine any issue if you've got a job, aren't crippled by debt and can afford the loan.

I have to agree... Unless there is an issue with there not being a dwelling on the property.

Well I learned something new today...

Try to bring your rent in line with mortgage payments. Work with the bank and tax office to determine how small of a property you'd need to pay your current rent, then subdivide.

Personally I don't like sound of the contract deal. Sounds like too much stuff could change between now and the sale or title transfer.

I'd figure out what you can afford now (don't forget subdivision fees like surveyor, plan review, etc) and buy now, if you can.

Dr. Hess wrote: I think you need to know this: "Don't Do It." I have never heard of one that ended well. I have heard of a lot that ended like dmyntti's brother's did.

I have had land contracts on two occasions for two properties, paid both off and had no issues. I did use a competent lawyer to set the contract and made early pay off a non penalty option.

Steve

carguy123 listed the reasons I'd be concerned. My understanding of land contracts: Basically, the guy owns the property until it's paid off then it's subdivided. He can't sign away the rights of a third party unless everything goes through the legal process of splitting that piece off.

It's possible for an individual to hold a mortgage, my dad used to do it all the time. If this guy is willing to do that, as in: survey the property and convey a deed subject to the mortgage being paid off then you are both protected.

One other thing to consider: does the property have road frontage, or do you have to cross his property to get there? If so, then you need to include an easement. Otherwise, if he sells the adjoining property and the new owner does not want you crossing his property you are screwed. I turned down a dirt cheap deal on a 3/4 acre lakefront property because of that, the landowner in front refuesd to grant an easement.

My BIL just got a mortgage that is every bit as stupid as it would of been at the height of Mortgage silliness. He had no issues getting a ~200K house on a ~$50K Combined Household income with <3% down. He was approved to $250K.

What does he want for the whole property? I would strongly consider buying it and renting the house and setting up a Go-Kart/Motorcycle track on the 2 acres..

nocones wrote: My BIL just got a mortgage that is every bit as stupid as it would of been at the height of Mortgage silliness. He had no issues getting a ~200K house on a ~$50K Combined Household income with <3% down. He was approved to $250K.

That is depressing. Whatever bank agreed to that should have it's CEO and entire loan staff fired by it's BOD. A mortgage for 4 times combined income is nuts unless you can prove your ability to save and pay by putting down at the very very least 10%, preferably 20%

Adrian_Thompson wrote:

nocones wrote: My BIL just got a mortgage that is every bit as stupid as it would of been at the height of Mortgage silliness. He had no issues getting a ~200K house on a ~$50K Combined Household income with <3% down. He was approved to $250K.

That is depressing. Whatever bank agreed to that should have it's CEO and entire loan staff fired by it's BOD. A mortgage for 4 times combined income is nuts unless you can prove your ability to save and pay by putting down at the very very least 10%, preferably 20%

America! We learn from our mistakes!

Oh... that's not gone well. DO IT AGAIN!

Did i ever tell you guys about the time that my fiancee was approved for up to a $160k mortgage? Yeah? Did i tell you that at the time, she was grossing $16k a year? No co-signer required, just sign the dotted line, ma'am!

WTF, indeed.

nocones wrote: My BIL just got a mortgage that is every bit as stupid as it would of been at the height of Mortgage silliness. He had no issues getting a ~200K house on a ~$50K Combined Household income with <3% down. He was approved to $250K.

I'm assuming no co-signer?

None that I am aware of.

I would, at all costs, attempt to get road frontage.

It raises the value of your property, allows you to sell it more easily, and prevent angry neighbors from blocking,using, or maintaining a shared access.

I've seen quite a few problems with easements because they seemed to be popular in a day and age when people weren't shiny and happy and these days they can be problematic.

Alot of good points to consider. Just trying to arm myself with as much info as possible before I meet with my lawyer.

A couple things... First, definitely going to have a no-penalty clause for early payoff. Plan is to pay the balance off in 2-1/2 to 3 years. Also, the owner is a single guy, so that eliminates the divorce scenario.

Mortgage is out of the question due to the non-dwelling nature of the property. Not interested in the house, and i have zero time to devote to the hassles of being a landlord.

There is also a motocross track across the street, so any potential purchaser of the house will have bigger headaches than me running an air compressor on a Sunday afternoon.

And, the property is a corner lot, so road frontage on two sides. House and rest of the property are on a separate driveway.