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| The Terramar Team ___________________________ (239) 498-6885 Al@AlBailleres.com |
| Al Baillères (“Bailler”) Consultant |
LAND CONTRACT alternative to Seller Held Mortgage on Free and Clear Scenarios.-
Under such an arrangement, the seller and the buyer enter into a real estate contract. The
parties agree that the deed to the property will be held in escrow by a neutral third party,
usually the settlement agent. The buyer agrees to pay the seller a fixed amount every month,
and when the agreed-upon price has been reached -- or when the buyers are finally able to
obtain institutional financing -- the seller will be paid in full. The deed then will be taken out of
escrow and recorded in favor of the buyer.
A land sales contract is different from a seller holding the mortgage on a property. If the buyer
does not pay a mortgage, the seller has to go through time-consuming and expensive
foreclosure to recover a property. Under a land sales contract, the seller still legally owns the
property.
Here's how it works: A seller has a house that he wants to sell for $400,000. The house is free
and clear; there is no mortgage. The buyer signs a contract under which he will give the seller
a 10 percent deposit, or $40,000. Then he will pay the buyer the difference in monthly
installments, based on a mutually agreed-upon interest rate. In our example, if the parties
agree on a 6 percent rate, amortized over 30 years, the buyer will pay the seller $2,158.38 a
month. The buyer will also agree to pay the real estate tax and the homeowner's insurance.
The advantage to the seller is that he is relieved of the obligation to maintain and care for the
house, and will be getting a decent rate of return on his money. There are tax consequences
involved with such a transaction, and your tax adviser should be consulted before you enter
into such an agreement.
The disadvantage to the seller, of course, is that he will not receive all of the sales proceeds
upfront.
From the buyer's point of view, if he can afford the monthly payment, he will have a house in
which to live, and he will avoid having to qualify for a mortgage.
This is an easy example. But what if the seller has an outstanding mortgage? Almost all
mortgages nowadays contain what is known as a "due on sale" clause. This means that when
the property is sold -- and this includes a long-term lease or a land installment sale -- the
entire mortgage is due and payable.
Many people, especially in the early 1990s when interest rates were high, tried to enter
installment sales contracts without telling their lenders. Buyers would make the monthly
payments to the sellers, who in turn would pay the mortgages. In many cases, lenders did not
find out about such transactions. Many people, though, were caught, and their mortgages
were called.
Accordingly, if you are the seller and have a mortgage, you must confirm with your lender that
it will allow the land installment sale transaction to go forward. If your loan is an adjustable-rate
mortgage, your lender may not object, although it will want to determine the credit worthiness
of your buyer. It will also insist that you remain legally obligated under the loan in case the
buyer defaults.
Land installment contracts are not new. As far as I have been able to determine, they date to
the 1800s. A rancher might have had many acres that some of his farmhands wanted to buy.
Each would cost $500. The farmhand would give the rancher $10 as a down payment and
would pay the rancher $10 a month until the balance of the price was paid. Sometimes the
rancher would charge interest, sometimes not.
When the full amount of the purchase price was paid, the rancher would transfer title to the
real estate "in fee simple" to the buyer. A deed would be recorded, and the buyer would then
be the owner of the property.
If the buyer defaulted before making all the monthly payments, the buyer could lose all of his
rights to purchase and might also forfeit all the money given to the rancher.
Many years ago, the Internal Revenue Service took the position that such a land sales
contract transaction was a sale for tax purposes. The seller would have to report the sale and,
depending on the circumstances, pay tax on any profit that was made (albeit on an installment
basis).
Even though the seller remains the legal owner of the property, the buyer becomes the
"equitable" owner. For tax purposes, the purchaser would be considered the owner of the real
estate, so that any mortgage interest and real estate taxes paid would be deductible on his
income tax return.
The theory behind such transactions is that it is anticipated that in the years to come, the
buyer's income will increase, as will the value of the house, so that the buyers will ultimately be
able to refinance with a commercial lender and pay off the seller in full.
Logistically, it works this way:
There are two settlements. In the first, the parties will sign a contract, spelling out all rights and
obligations of each. The sellers will sign a deed that will be held by the settlement attorney or
title company in escrow. The contract will spell out the requirements for taking this deed out of
escrow. If, for example, the purchaser fully complies with all the terms of the contract and is
able to pay the full amount of the outstanding note, the deed is to be recorded in the name of
the purchaser. This would take place at the second or final settlement.
However, if the buyer is in arrears on the monthly payments, and the seller gives reasonable
notice of this default to the buyer, the deed will be taken out of escrow and returned to the
seller. At that time, the purchaser will become a tenant, and -- subject to landlord-tenant laws
of the jurisdiction where the property is located -- may be evicted.
Buyers and sellers under this kind of arrangement should negotiate, before a contract is
entered into, all the important terms and conditions, especially what would happen upon a
default.
In the case of a default, sellers usually want the buyers to move out of the property and to
forfeit all the money paid to the date of the default. Buyers usually are prepared to move out
but do not want to forfeit any of their money. This issue must be resolved, in writing, before the
transaction has been completed.
Some people consider it unfair that the buyer should lose all the money paid in case of a
default. However, the response to this is that the buyer has had the use of the house and in
effect has paid rent to the owner. And, unlike a tenant, the buyer can deduct the mortgage
interest paid to the owner as well as the real estate taxes.
It must be pointed out that in order to take those deductions, there has to be a deed of trust
(mortgage) recorded on the land records. That should be arranged at the first settlement.
Laws in some states, require that a land contract be recorded among the land records in the
jurisdiction where the property is located. That is to protect the buyer, because it puts the
world on notice that the buyer has equitable title to the property. If the deed is not recorded
and the buyer is dealing with a dishonest seller, there is nothing to stop that seller from
fraudulently selling the property to a third party, who may have absolutely no knowledge about
the land sales contract.
The land sales contract clearly raises many legal questions, although they are not
insurmountable. If you wish to pursue such a transaction, make sure that you discuss these
issues fully with your tax and legal advisers and that your carefully drafted land sales contract
addresses all of them.
How is The Terramar Team different?
We offer you personalized service. The Terramar Team will develop a plan for each individual
situation and set of circumstances. We want our clients to know all of their options and make informed
choices. The Terramar Team wants you to understand that there are many alternatives to the
conventional purchase and sale option. Our One Source Consulting Consortium, inclusive of Credit
Repair, Mortgage Investment & Funding, Real Estate Investment & Sales, and Closing & Title
Insurance services, provides the Terramar Team incomparable strength at your disposal for your
protection.
APPLY NOW. Our consultants can help you find the right solution for you! Call us for a no-cost
review.
Under such an arrangement, the seller and the buyer enter into a real estate contract. The
parties agree that the deed to the property will be held in escrow by a neutral third party,
usually the settlement agent. The buyer agrees to pay the seller a fixed amount every month,
and when the agreed-upon price has been reached -- or when the buyers are finally able to
obtain institutional financing -- the seller will be paid in full. The deed then will be taken out of
escrow and recorded in favor of the buyer.
A land sales contract is different from a seller holding the mortgage on a property. If the buyer
does not pay a mortgage, the seller has to go through time-consuming and expensive
foreclosure to recover a property. Under a land sales contract, the seller still legally owns the
property.
Here's how it works: A seller has a house that he wants to sell for $400,000. The house is free
and clear; there is no mortgage. The buyer signs a contract under which he will give the seller
a 10 percent deposit, or $40,000. Then he will pay the buyer the difference in monthly
installments, based on a mutually agreed-upon interest rate. In our example, if the parties
agree on a 6 percent rate, amortized over 30 years, the buyer will pay the seller $2,158.38 a
month. The buyer will also agree to pay the real estate tax and the homeowner's insurance.
The advantage to the seller is that he is relieved of the obligation to maintain and care for the
house, and will be getting a decent rate of return on his money. There are tax consequences
involved with such a transaction, and your tax adviser should be consulted before you enter
into such an agreement.
The disadvantage to the seller, of course, is that he will not receive all of the sales proceeds
upfront.
From the buyer's point of view, if he can afford the monthly payment, he will have a house in
which to live, and he will avoid having to qualify for a mortgage.
This is an easy example. But what if the seller has an outstanding mortgage? Almost all
mortgages nowadays contain what is known as a "due on sale" clause. This means that when
the property is sold -- and this includes a long-term lease or a land installment sale -- the
entire mortgage is due and payable.
Many people, especially in the early 1990s when interest rates were high, tried to enter
installment sales contracts without telling their lenders. Buyers would make the monthly
payments to the sellers, who in turn would pay the mortgages. In many cases, lenders did not
find out about such transactions. Many people, though, were caught, and their mortgages
were called.
Accordingly, if you are the seller and have a mortgage, you must confirm with your lender that
it will allow the land installment sale transaction to go forward. If your loan is an adjustable-rate
mortgage, your lender may not object, although it will want to determine the credit worthiness
of your buyer. It will also insist that you remain legally obligated under the loan in case the
buyer defaults.
Land installment contracts are not new. As far as I have been able to determine, they date to
the 1800s. A rancher might have had many acres that some of his farmhands wanted to buy.
Each would cost $500. The farmhand would give the rancher $10 as a down payment and
would pay the rancher $10 a month until the balance of the price was paid. Sometimes the
rancher would charge interest, sometimes not.
When the full amount of the purchase price was paid, the rancher would transfer title to the
real estate "in fee simple" to the buyer. A deed would be recorded, and the buyer would then
be the owner of the property.
If the buyer defaulted before making all the monthly payments, the buyer could lose all of his
rights to purchase and might also forfeit all the money given to the rancher.
Many years ago, the Internal Revenue Service took the position that such a land sales
contract transaction was a sale for tax purposes. The seller would have to report the sale and,
depending on the circumstances, pay tax on any profit that was made (albeit on an installment
basis).
Even though the seller remains the legal owner of the property, the buyer becomes the
"equitable" owner. For tax purposes, the purchaser would be considered the owner of the real
estate, so that any mortgage interest and real estate taxes paid would be deductible on his
income tax return.
The theory behind such transactions is that it is anticipated that in the years to come, the
buyer's income will increase, as will the value of the house, so that the buyers will ultimately be
able to refinance with a commercial lender and pay off the seller in full.
Logistically, it works this way:
There are two settlements. In the first, the parties will sign a contract, spelling out all rights and
obligations of each. The sellers will sign a deed that will be held by the settlement attorney or
title company in escrow. The contract will spell out the requirements for taking this deed out of
escrow. If, for example, the purchaser fully complies with all the terms of the contract and is
able to pay the full amount of the outstanding note, the deed is to be recorded in the name of
the purchaser. This would take place at the second or final settlement.
However, if the buyer is in arrears on the monthly payments, and the seller gives reasonable
notice of this default to the buyer, the deed will be taken out of escrow and returned to the
seller. At that time, the purchaser will become a tenant, and -- subject to landlord-tenant laws
of the jurisdiction where the property is located -- may be evicted.
Buyers and sellers under this kind of arrangement should negotiate, before a contract is
entered into, all the important terms and conditions, especially what would happen upon a
default.
In the case of a default, sellers usually want the buyers to move out of the property and to
forfeit all the money paid to the date of the default. Buyers usually are prepared to move out
but do not want to forfeit any of their money. This issue must be resolved, in writing, before the
transaction has been completed.
Some people consider it unfair that the buyer should lose all the money paid in case of a
default. However, the response to this is that the buyer has had the use of the house and in
effect has paid rent to the owner. And, unlike a tenant, the buyer can deduct the mortgage
interest paid to the owner as well as the real estate taxes.
It must be pointed out that in order to take those deductions, there has to be a deed of trust
(mortgage) recorded on the land records. That should be arranged at the first settlement.
Laws in some states, require that a land contract be recorded among the land records in the
jurisdiction where the property is located. That is to protect the buyer, because it puts the
world on notice that the buyer has equitable title to the property. If the deed is not recorded
and the buyer is dealing with a dishonest seller, there is nothing to stop that seller from
fraudulently selling the property to a third party, who may have absolutely no knowledge about
the land sales contract.
The land sales contract clearly raises many legal questions, although they are not
insurmountable. If you wish to pursue such a transaction, make sure that you discuss these
issues fully with your tax and legal advisers and that your carefully drafted land sales contract
addresses all of them.
How is The Terramar Team different?
We offer you personalized service. The Terramar Team will develop a plan for each individual
situation and set of circumstances. We want our clients to know all of their options and make informed
choices. The Terramar Team wants you to understand that there are many alternatives to the
conventional purchase and sale option. Our One Source Consulting Consortium, inclusive of Credit
Repair, Mortgage Investment & Funding, Real Estate Investment & Sales, and Closing & Title
Insurance services, provides the Terramar Team incomparable strength at your disposal for your
protection.
APPLY NOW. Our consultants can help you find the right solution for you! Call us for a no-cost
review.
| Al Baillères Consultant: |
| Tel: (239) 498-6885 |
WE BUY NOTES*! If you have a real estate note to sell we want to hear from you. Please e-mail us at Al@AlBailleres.com to request a submission worksheet for you to complete. Once received, we will review and respond quickly. *We buy first, second or third position performing or non-performing notes. |
WE SOLVE PROBLEMS! Our goal is to help people get into properties they want or to help people get out of properties they either don't want or can no longer keep. If you or someone you know are facing hardship related to a property, don't wait, call us NOW!. We can often STOP foreclosures in 72 hours! |
