From the desk:Seller Financing (As Seller)

A buyer on my vacant lot asked if I'd take payments. Signing what?

I have a 1.1 acre vacant lot I've been trying to sell for 95k. Been listed nine months, two lowballs, and now someone wants it for the full 95 if I'll take 10k down and payments over five years at 7%. They want to put a small house on it eventually.

I've never been on this side of anything. I understand the basic idea, they pay me instead of a bank, I get interest. What I don't understand is the paperwork. Do I hand them the deed at closing and hope, or is there something that keeps my name attached until they've paid? I've seen the terms promissory note, deed of trust, and land contract used in what looks like the same sentence and I can't tell if those are three names for one thing or three different arrangements.

The money side I can follow. 85k at 7% over five years is around 1,683 a month, which is more than the lot is doing for me now sitting empty. Property taxes are about 900 a year and I'd want those paid, obviously.

What I actually need to decide by Friday is whether to say yes in principle before I know what structure I'd be using. I don't want to agree to something and then find out the version I agreed to is the version that leaves me exposed.

Answer

1wendy_park48CapitalPRO7

They're 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've 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's a normal thing to write.

One more thing for the term sheet: who pays the 900 in taxes and how you'll know they did. On raw land nobody notices a tax delinquency until it's ugly.

2 replies

3sonia_alvarez Get yoursPRO6

Your payment math checks out, 85k, 7%, 60 months lands right around 1,683.

On the taxes, use a third party servicer even on one small note. They'll 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're 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.