Happening NowSeller Financing (As Seller)

A buyer on a vacant lot asks the seller to take payments, and the seller needs to know what to sign

A scenario worth working through for anyone about to carry paper for the first time. Say an owner has a 1.1 acre vacant lot listed at 95k for nine months, two lowballs, and now a buyer wants it at the full 95 if the seller will take 10k down and payments over five years at 7%. The buyer wants to put a small house on it eventually. The basic idea is easy to follow: the buyer pays the seller instead of a bank, and the seller earns interest. The paperwork is the part most first time sellers do not understand. Does the seller hand over the deed at closing and hope, or is there something that keeps the seller's name attached until the balance is paid? The terms promissory note, deed of trust, and land contract show up in what looks like the same sentence, and it is not obvious whether those are three names for one thing or three different arrangements. The money side is straightforward. The balance of 85k at 7% over five years is around 1,683 a month, which is more than an empty lot produces. Property taxes are about 900 a year and the seller wants those paid, obviously. The decision a seller in this position faces by the end of the week is whether to say yes in principle before knowing what structure would be used. Agreeing to something and then finding out the version agreed to is the version that leaves the seller exposed is the outcome to avoid. So which of those arrangements protects the seller, and what does each one actually require?

luis_carrera CS1CPRO 12

Answer

wendy_park48 CU1BPRO 17

They are different arrangements, and the difference is who holds title while the buyer pays. In the note and deed of trust version, you deed the property to the buyer at closing. The buyer signs a promissory note, which is the promise to pay, and a deed of trust or mortgage, which is the security instrument that puts a recorded lien on the property. If they stop paying you foreclose that lien. The buyer owns the lot the whole time, and your protection is the recorded lien. In a land contract, also called a contract for deed, you keep title and the buyer gets possession and an equitable interest, and the deed transfers only when they have paid in full. Sounds safer for you and often isn't. Several states treat a land contract buyer with substantial payments in much the same way as a mortgage borrower, meaning you may still have to run a foreclosure style process to get them out, and some states have specific notice and cure requirements for these contracts. Which instrument is normal and how default actually gets handled varies state by state, so ask a real estate attorney licensed where the lot sits before you pick. Say yes in principle to price and rate, and say the structure is subject to documents. That is a normal thing to write. One more thing for the term sheet: who pays the 900 in taxes and how you will know they did. On raw land nobody notices a tax delinquency until it is ugly.

wendy_park48 CU1BPRO 17

2 replies

sonia_alvarez CB4APRO 17

Your payment math checks out, 85k at 7% over 60 months lands right around 1,683. On the taxes, use a third party servicer even on one small note. They collect the payment, hold an escrow for the tax bill, pay the county, and send you and the buyer a year end statement showing the interest and principal split. On a five year note that fee is small and it means you are not the one reconstructing a payment history from memory if this goes wrong. And write the interest and principal split into the file from day one. Interest income and return of principal get reported differently, so get your accountant the amortization schedule before the first payment rather than in April.

sonia_alvarez CB4APRO 17

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