Owner Financing Land
Financing a land sale involves less risk to the seller than home financing. The obvious factor being the fact the buyer probably can’t destroy the value of land as easily as they can a house.
Properly done, seller financing of land can work really well for both buyer and seller. In the most successful land deal I ever did I used money borrowed from an investors Self Directed IRA to buy 40 lots in a old subdivision from a long-time owner for cash. In turn I sold the lots of easy terms to a developer who installed utilities and set up used mobile homes for sale on easy terms. When the new buyers got their home financed I got paid off.
Of course when I look back I was exposed to a lot of risk that I wasn’t really aware of. Ten years afterward the market and economy has changed and the lots are mostly vacant again. The homes have been repossessed and the improvements (well, pumps, etc.) are gone.
Successful investing is never easy.
{ 8 comments… read them below or add one }
My question is! If I owner financed a lot with a house and the house burned down do I have to pay off the mortgage before I can replace the house with another dwelling?
It depends.
If the paperwork was done properly, the Lender will be named on the insurance policy as a Loss Payee. That means they have to agree before the insurance check can be cashed. If the lender was a private party and willing to work with the buyer, something could probably be worked out. They would need a lawyer to escrow funds, make sure work was completed before funds were released. It would be complicated.
If you have owner financed the sale of a property with an existing mortgage then I doubt it could be done. It might be possible, but there are so many complications I doubt it could be done in the real world. Especially in our current economic conditions.
Note that I am not a lawyer and don’t know enough about your particular situation to be sure this is correct.
My question is, we are trying to purchse 12 acres land behind our 1 acre property in a busy suburban area. We would like to ask the owner if he would owner finance it due to the banks have said no to the loans on raw land. We do have a commercial plan to offer 20% down on $550,000.00 price (if appraised) but how can I make this appealing to the owner. If he does not agree is it easy to find investors?
I remember listening to a Robert Allen radio interview back in the 1980’s sometime where he said the secret to real estate success was “Don’t deal with unmotivated sellers.” The successful investors I know follow this rule. They look for the deal first and then see if they think they can profit from it.
In other words, if the seller doesn’t have some strong motivation to sell, owner financing probably won’t be attractive no matter how hard you try. The usual benefits would be a much higher rate of interest on the balance that he can get from alternate investments, More flexibility in how the payments are structured. The tax advantages of an installment sale.
I think you need to do a lot of research on the current owner. Is he ready to sell? Does he need cash? Is he planning his retirement? Does he have heirs he needs to keep happy? Etc.
Investors make things much more complicated. The rule I was taught is that “Money is easy to find if the deal is good enough.” I could have avoided a lot of failure if I had remembered that. In other words, if you are having a lot of trouble convincing investors to put up money, maybe it’s not such a great idea.
I would suggest you consider setting up an LLC to hold the property if you go the investor route. If done with good legal advice that will prevent (or provide ways to handle) many of the issues that destroy these kinds of deals.
Good luck with it.
Hi, I own a piece of open land (paid off already) and a buyer is interested in purchasing it with 10-year owner financing. He’s going to build his own home on it. My questions are:
1. Do I have to agree in writing for him to build any improvements since he doesn’t own the land yet (he won’t get the title until the end of the land contract or when it’s paid-off)? Or is he free to do anything on the land?
2. Is he soley responsible for the property taxes on the improvement home-site? Will the property taxes be accessed seperately on land and improvement?
3. If he defaults on the land payments, can I just simply take back my land or will I be faceing other problems such as dealing with his improvement?
Thank you in advance. Any insights and comments would be greatly appreciated.
I don’t suppose your buyer will be very interested if he can’t build on it.
If he ever needs to borrow money for materials or to get the house finished he will no doubt have to pay you off since I doubt any lender would be willing to be in second position behind you.
The rest of your excellent questions are lawyer material.
Thank you very much for your time in answering my questions. I guess that I’ll have to look for a real estate attorney to get it done properly.
You’re welcome.
There are two dimensions to putting together good real estate deals. The pros and cons of various techniques, when they should be used, how they can shift benefits between buyer and seller, etc. are all good things to study and learn about. When you have an actual deal in mind it gives you the information you need to go to your attorney and specify what you are trying to do and why. That’s the kind of thing I like to talk about on this site.
When it comes to actually drafting documents and getting them signed you need an attorney. There are lots of local variations in how things are done, laws that apply, regulations and restrictions that may come into play, etc. For example, I know of at least one water system that started making unpaid water bills a lien against the property. Great fun if you are a landlord or have sold the property on a contract because now you get to pay the water bill(s). This is why I constantly harp on the need for an experienced real estate attorney. They will know about this kind of thing and include language to handle it. It’s not the sort of thing a fresh law school graduate can be expected to know. It’s not even the sort of thing an experienced attorney who practices in some other field may know.
I know attorneys are expensive and it’s tempting to avoid them. However, litigation is always cheapest when avoided. If you do end up standing in front of a judge, confidence that your paperwork is the best it could be is a really good feeling.