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Owner financing raw land: collateral risk and contract for deed versus a note and mortgage

A common seller financing scenario involves 40 acres of mostly wooded, unimproved land with a gravel access easement and zoning allowing one house per 10 acres. Say the asking price is $62,000 and the only serious buyer wants owner financing because no local bank will lend on raw land at reasonable terms. A typical offer might be $10,000 down with the balance financed at 9% over 12 years, producing a monthly payment in the range of $590. Two things are worth working through before accepting terms like that. First, raw land as collateral is weak. If a buyer stops paying, what comes back through foreclosure is the same land the seller was trying to exit, and it doesn't improve, doesn't rent, and can take a long time to resell. Second, the choice between a note secured by a mortgage or deed of trust and a contract for deed matters. A mortgage or deed of trust transfers title at closing and gives the seller a lien, with foreclosure following the state's normal process. A contract for deed keeps title with the seller until the balance is paid off, which in many states gives the seller a faster path to reclaim the property on default, though a growing number of states have added consumer protections that slow that process down or require it to look more like a foreclosure. Which one applies is jurisdiction specific and worth a conversation with a real estate attorney before signing anything. On resale, land notes generally have a smaller and thinner secondary market than notes secured by houses, since fewer note buyers are set up to evaluate raw land collateral. That doesn't make the note worthless, but it does mean pricing a future sale of the note at a meaningful discount to what a comparable house note would fetch.

nicole_adeyemi SS3APRO 13

Answer

derekj19ServicePRO

On the two documents, the plain version. With a note and a mortgage or deed of trust, he gets the deed at closing and you hold a recorded lien against the land. With a contract for deed, you keep title until he finishes paying and he holds a contract right to get it. They behave very differently on default, and the process and timelines for both are set by state law, so which one is even available to you and what you'd have to do to unwind it is a question for a real estate attorney licensed where the land sits. Ask them that in exactly those terms.

On the money side, 10k on 62k is about 16% down. On raw land I've heard people want a lot more than that, because a buyer who walks away from bare ground doesn't lose much and doesn't feel the way he would about walking away from his house.

derekj19ServicePRO

2 replies

luis_carrera CS1CPRO 12

Run the payoff schedule before countering. Say 52k at 9% over 144 months runs about 590 a month, and after three years roughly 43k is still owed. So a year three default hands back land that was asking 62k, with 19k of the buyer's money collected and whatever the process cost. That's not a bad outcome. It's just a slow one, worth deciding in advance whether doing it twice would be acceptable. On resale: land notes do trade, and they trade worse than house notes. Small balance, no structure to insure, and the buyer's recovery is a piece of ground somebody has to want. Assume a heavier discount than the numbers usually quoted for houses. If the monthly payment is the main goal, that doesn't matter much. If cashing out in year two is the goal, price that in by asking for more down.

luis_carrera CS1CPRO 12

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