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Digging Up the Dirt on Land Contracts and Seller Financing

I sell LAND for a living, and I am often asked if the seller is willing to finance the property. Many times the answer is YES. Financing land can be problematic unless you are working with a lender who specializes in these type loans, for example, Farm Credit Banks. So, for the most part, the buyer has two options:

1) finance through a bank or lending institute

2) Seller/Owner Financing

A land contract (also known as Contract for Deed) is a contract between the buyer and seller of real property in which the seller provides the buyer financing in the purchase, and the buyer repays the resulting loan in installments.

Advantage Seller – Speed because no bank is involved. Sellers in some cases can get a higher price for their property and the principal and interest payments go to the owner instead of the bank. This can make your Return on Investment (ROI) look very appealing. If the buyer fails to make payments, the seller/owner takes back the property and keeps the payments made by the buyer.

Advantage Buyer –  Speed because no bank is involved. Having your credit checked repeatedly can negatively affect your credit score. Some buyers have marginal credit and financing through the seller makes lots of sense and saving fees related to a conventional loan such as appraisals, origination fees, etc.

When closing, the attorney will prepare documents (promissory note) that state the terms of the loan such as down payments, interest rates, term or length of the loan, due date for payments, and penalties for non-payment. If payments are not made, the seller/owner will begin foreclosure on the property. There are two types of foreclosures and the type will depend on the state you live in.

Judicial Foreclosure – Foreclosure by judicial sale, commonly called judicial foreclosure, involves the sale of the mortgaged property under the supervision of a court. The proceeds go first to satisfy the mortgage, then other lien holders, and finally the mortgagor/borrower if any proceeds are left. Judicial foreclosure is available in every US state and required in many (Florida requires judicial foreclosure). The lender initiates judicial foreclosure by filing a lawsuit against the borrower. As with all other legal actions, all parties must be notified of the foreclosure, but notification requirements vary significantly from state to state in the US. A judicial decision is announced after the exchange of pleadings at a (usually short) hearing in a state or local court in the US. In some rather rare instances, foreclosures are filed in US Federal Courts.

Non-Judicial Foreclosure – Foreclosure by power of sale, also called non-judicial foreclosure, and is authorized by many states if a power of sale clause is included in the mortgage or if a deed of trust with such a clause was used, instead of an actual mortgage. In some US states, like California and Texas, nearly all so-called mortgages are actually deeds of trust. This process involves the sale of the property by the mortgage holder without court supervision (as elaborated upon below). This process is generally much faster and cheaper than foreclosure by judicial sale. As in judicial sale, the mortgage holder and other lien holders are respectively first and second claimants to the proceeds from the sale.

This arrangement can be a win-win for both the seller and buyer. This is just another vehicle to help a buyer get into the property they want and help the seller achieve their goal of moving some property at a great price!!

This post was originally published on The Dirt Blog.

Kent Morris, ALC, is a Registered Forester and Associate Broker who has experience in fields such as timber appraisals, harvesting, thinnings, and timber sales.

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