In todays email:

• 🤓 First, I will compare and contrast buying a “mortgage note” versus buying a “land contract” or “contract for deed”.

• 😃 Second, I will explain the GOOD about Land Contracts (also known as Contract for Deed).

• 😐️ Third, I will explain the BAD about Land Contracts

• 😮‍💨 Fourth, I will explain the UGLY aspects of Land Contracts

Buying Notes versus Land Contracts

When you buy a mortgage note, you are purchasing the debt owed by the borrower to the original lender. This debt is secured by the property itself, and the borrower makes payments to you as the new note holder. When you buy a land contract, you are purchasing an agreement between the seller (vendor) and the buyer (vendee), where the vendee agrees to make payments to the vendor over time until the property is paid off. Unlike buying a mortgage note, purchasing a land contract gives you a direct ownership interest in the property. So for example, when I buy a land contract you get a deed to the property as well.

Buying a mortgage note can provide a steady stream of passive income in the form of interest payments from the borrower. You typically don't have to deal with property management or maintenance issues, as your investment is in the debt, not the physical property. As the buyer of a land contract, you have more control over the property compared to buying a mortgage note. You can potentially make decisions about the property, such as renovations or leasing, depending on the terms of the land contract.

If you buy a mortgage note and the borrower defaults on the loan, you have the right to foreclose on the property to recoup your investment. This process can be time-consuming and expensive and may result in you gaining ownership of the property if the foreclosure is successful. As a buyer of a land contract, if the vendee stop paying then you have the right to a forfeiture depending on the state you are in which is usually much quicker than a foreclosure (depending on the state). Some states do not have clear forfeiture laws and therefore you may have to foreclose on the property.

Remember that with a land contract the deed does not transfer until the loan is paid in full. The land contract buyer has "equitable title" under the contract and has the right to receive "legal title" upon paying off the balance of the loan. Whereas when someone buys a house with a mortgage they get the deed to the property immediately.

The GOOD about Land Contracts

Land contracts can attract buyers who might not qualify for traditional financing due to poor credit or insufficient down payment. This expands the pool of potential buyers, allowing sellers to sell their property more quickly.

Sellers have flexibility in negotiating terms, such as the down payment, interest rate, and repayment schedule. This can be advantageous for both parties, as they can tailor the contract to meet the buyers individual needs and circumstances.

Sellers may be able to command a higher sales price by offering financing through a land contract, especially in a market where financing is difficult to obtain or interest rates are high (like in today’s market).

Land contracts typically have lower closing costs compared to traditional mortgage loans, making them more affordable for both parties.

The BAD about Land Contracts

Since buyers do not obtain traditional financing and maybe a little less qualified, there is a higher risk of default. If the buyer fails to make payments, the seller may need to pursue legal action to reclaim the property, which can be time-consuming and costly. Now, that being said, we mitigate this by vetting the buyer and making sure they have the income to support the property and the proper debt to income, etc.

Buyers do not receive the same protections as they would with a traditional mortgage, such as the right to foreclosure mediation or protection from predatory lending practices. However, as seller of a property you should follow the same rules that is required when buying an institutional mortgage note.

If the property's value decreases over time, the buyer may find themselves owing more on the land contract than the property is worth, leading to financial difficulties.

Sellers retain legal ownership of the property until the contract is paid in full, which means they maintain control over the property and can potentially make decisions that affect the buyer's interest.

Land contracts can be complex legal documents, and both parties may require legal assistance to ensure that their rights and obligations are properly outlined and protected.

The UGLY aspects of Land Contracts

Selling on land contract is perfectly fine and only gets UGLY when the seller does not follow the Dodd-Frank rules which are partly summarized below👇

• The loan cannot include a balloon.

• Seller does have to prove borrowers ability to repay.

• Interest rate fixed for first 5 years and no negative amortization.

• Adjustable rate allowed but cannot adjust more than 2% per year or more than 6% over life of loan.

• Seller must not be the builder.

• Seller must have owned the property.

Check out this prior newsletter for more details.

If you are buying an existing land contract for the cash flow, then you want to make sure that the land contract seller properly originated the land contract and followed all the rules. Best is when the land contract originator uses a mortgage loan originator (MLO) as part of the process. That way you, as the land contract buyer, will be protected and not have any issues down the road.

If you need help with any of the topics in these newsletters then email [email protected] to get more information about our advisory/consultation service.

We would love to get your feedback and your thoughts! Let us know which topics are of interest or where you need more clarity. Just respond to this email directly 😌 or email [email protected].

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