Buying land, Owner financing

Pigeon Lady · #1 04/01/08, 02:18 PM

You were all very helpful to me when I had questions about this last year. But now I have a couple more.

We've been working with our neighbor who is going to sell us about 26 acres of land that joins our property. We applied for a loan through Farm Credit and it was approved. However I only have about half the 22% down payment saved up at the moment. ( Didn't want to use our home equity)

Today in talking with the neighbor he told us that he's almost finallized the sale of another piece of his property and he will be in a much better financial situation. So now he would be able to finance the piece we want to buy. He would only want about 10% down which is no problem. However neither he nor us know anything about owner financing. Could you all give us some pointers on the way to go about this?

I guess we would go through a real estate lawyer? He gave us the name of the lawyer he has been using. Would that be a conflict of interests? or is it ok to go with the same guy. It's a very small community and I know most of the real estate agents use this guy.

My main question though is how does owner financing work. Would we pay the same interest as if we were going through the bank?

Just want to understand the process before going into anything.

Thank you,

Pauline

RichieC · #2 04/01/08, 02:55 PM

Yes, you should use a lawyer. I recommend you get your own. It is common practice in closings for both sides to use the same lawyer, but that is when there is also a financing agency or bank that is providing some oversight on the terms. In an owner-financed situation, it is a completely open transaction, and you should get your own lawyer.

Someone will be along shortly to point out that I am a lawyer and accuse me of shilling for business for my brethren, but this is my honest advice. Get a lawyer, of your own.

As for the interest rate, it can be whatever both parties agree to. Except for certain usury laws that hopefully would never apply. It is customary for the rate to be a bit higher than the rate from a bank; if you can get anything under 6, you should jump on it.

fantasymaker · #3 04/01/08, 03:09 PM

There are at least three ways to go about this,
Rent to own,
Contract for Deed.
Owners mortgage
The last is just like getting a mortgage from a bank and its the one I recommend to both of you.

Gercarson · #4 04/01/08, 03:18 PM

Quote:

Originally Posted by fantasymaker

There are at least three ways to go about this,
Rent to own,
Contract for Deed.
Owners mortgage
The last is just like getting a mortgage from a bank and its the one I recommend to both of you.

A contract for deed is very similar to an owner's mortgage - both are safe and achieve the same purpose - sale of land and ownership of that land. Only caveat - get a lawyer, record the deed!

Michael Kawalek · #5 04/01/08, 03:34 PM

HI Pauline
When we bought our land we hired our own lawyer, who wrote up our official offer and reviewed all the contract paperwork. We went with owner financing with 50% down. We used our home equity to finance the down payment, then arranged 4 equal balloon payments at the same interest rate as our HELOC. Balloon payments are common for agricultural land. Basicly it was a 4 year loan, making a single YEARLY payment equal to 12.5% of the sale price, plus interest.

As we pay down the HELOC monthly, the amount payed off over a year more or less equals the amount of the yearly balloon payment. So, for each yearly balloon payment we withdrawn that much again from our HELOC. This has worked well for us. This year is our final balloon payment, then we'll own the land free and clear. After that, we just have to pay off the HELOC along side our regular mortgage.

By the way, after the sale was finalized, the seller sold our loan to a regular mortgage company. I don't know exactly how much he got for it, but we now write our yearly checks to the company instead of the seller.
Michael

Common Tator · #6 04/01/08, 03:49 PM

We have bought one property with owner financing and sold two that way. No Real Estate agents involved. We used a title or escrow company who performed the title search, did all the paperwork, provided the forms and did the legal filings. The interest rate and other terms are whatever you two agree to.

We used a simple amortization program on the computer that figured out what the payments were and how much principal and interest were for each payment (needed for tax filing). The payment receipt books are available at stationary stores.

All three transactions are completed, as the buyers on both of our sales refinanced and paid us off, and the one purchase we made that way was also paid off early. If your neighbor is an honest man I would have no problem doing this again.

All of the other posters on this thread have said to use a Real Estate Attorney. That may be sound advice. We never did, and were satisfied that all was done properly and legally. I had every confidence that the title and escrow companies knew exactly what they were doing, because that is all they do day in and day out.

agmantoo · #7 04/01/08, 04:23 PM

If I am selling I prefer to sell on rent to own, seldom do I get any down payment of significance and I am more likely to get the property back. If I am buying I go with a deed of trust and a promissory note, typically I pay a significant down payment to encourage the seller to do an owner finance and at a decent interest rate.. Obviously the latter offers better protection on the transaction completing.

Pigeon Lady · #8 04/01/08, 07:58 PM

Thank you all so much!

We'll contact the lawyer we used when closing on our house.

We really appreciate all the advice. We have a much clearer picture of what to do now.

It's great to have such a knowledgeable bunch to ask questions of!

Thanks again,

Pauline

**clovis** · #9 04/01/08, 09:00 PM

1. Get your own attorney!!!! Get a good one that works for YOU.
2. Negotiate hard on the interest that he is charging. Make him compete for a better rate than the bank offers. Where else can he get that kind of return? He is not doing you any favors by charging you a higher rate than the bank. Higher rates on owner financed land is because people cannot get financed by a bank. You do not fall into this category.
3. Research the downfalls of contract sales. There can be serious problems if the contract is not written or recorded properly. I have heard that lease to own can better protect the buyer if the seller gets sued, or is involved in BK. I do NOT know this for fact; please research this on your own.
4. Insist that you can pay this off early, with no penalty.
5. Understand that the seller can typically borrow against the property, even though you have a land contract. Understand the ramifications, and re-read #3.
6. Never borrow on your house to buy more land-no matter what!!!!!!
7. Keep the newly bought land as a seperate tract until you have both the house and land paid for in full. If you lost one due to foreclosure, you still have the other one.

Clove

quietstar · #10 04/01/08, 09:11 PM

Hi Pauline..Three things I would want to have as a Buyer of property that is owner financed:
(1) An "on or before" note secured by the same mortgage instrument Virginia banks use.

(2) A title policy from a major title insurance company. I usually have the title lawyer draw all papers because they have a serious vested interest in doing it right and the legal fees are often less than hiring a private lawyer for a simple, straightforward sale.

(3) Request the Seller locate and mark all corners, then compare them to the metes and bounds in the title policy. Could save a sizable survey fee.

Good luck and enjoy this very American process of buying property. PM if needed...Glen

Pigeon Lady · #11 04/01/08, 10:33 PM

Clovis,

Thanks for the additional pointers.

Yes, I've been thinking about the interest rate.

Is it in our best interests to go with owner financing rather than through the bank? ( Farm Credit in this case) Since we are already approved for the loan.

For some reason I was under the impression that owner financing was the way to go if at all possible but now I'm second guessing that. It's nice that we wouldn't have to come up with such a large down payment but if the interest rate is going to be higher, then it seems like one cancels out the other - if that makes sense.

I had this notion that owner financing meant we would save money somewhere, kind of like selling your house without using a realtor.

I can come up with the down payment but it's just going to take another few months of saving.

Beginning to think we should stay on our present course with the farm credit loan.

Quietstar thank you for your kind pm I'll be dropping you a line.

Pauline

Chixarecute · #12 04/01/08, 11:06 PM

A not for profit group that I work with bought the property my program was renting, from the landlord, on a land contract, work done by the local abstract company, on a standard State fill in the blank form. I believe there was a filing fee to record the land contract, and at closure, the (former) owner needed to provide a letter or form stating the contract had been paid in full, then there was another recording fee (both filings with the Register of Deeds at the county.) I also believe at the beginning of the process the abstract(or?) also had to do a deed search to verify trail of owner ship & possible presence of liens (sp?). Didn't have to do survey type stuff because the land in question was town lots.

The interest we paid was LESS than the bank, but MORE than the landlord would have gotten if he'd put the same amount of money in a cd. There was no down payment. Oh, and the abstract guy is the son of a deceased lawyer, does that count?

We had good history with the landlord, and had a good experience, were able to pay the contract off early. Hiring a lawyer is good advice...he is looking out for your interests.

Janis Sauncy · #13 04/01/08, 11:19 PM

I didn't use a lawyer when I bought my place with owner financing. The title company did all the paperwork, including the contract. Maybe I was lucky, but everything went extremely smoothly.

One thing I would highly recommend, though, is to find a bank that does "contract collections." In my case, it cost me $100.00 to set this up with a local bank. The seller has to agree to it, too, although I can't imagine why he would be opposed to it.

What this means is I make my payments to the bank, who then records it (very important) as having been paid, and then sends a check to the seller. It costs me an additional $5.00 a month on top of my payment (in addition to the one time set-up fee). Money well spent for the peace of mind knowing that I have proof that my payment has been received, the interest computed, and any additional I've paid is applied to the principal.

In fact, when I went into the bank last week to make my payment, the teller noticed that I was paying extra and she printed up a page showing me how much of a dent I've made on my principal over the past year by doing that. I didn't ask her; she just thought I would like to see it.

I get a monthly statement and, at the end of the year, a statement showing interest paid. The seller also gets similar accounting.

Janis

**clovis** · #14 04/01/08, 11:52 PM

Quote:

Originally Posted by Pigeon Lady

Clovis,

Thanks for the additional pointers.

Yes, I've been thinking about the interest rate.

Is it in our best interests to go with owner financing rather than through the bank? ( Farm Credit in this case) Since we are already approved for the loan.

For some reason I was under the impression that owner financing was the way to go if at all possible but now I'm second guessing that. It's nice that we wouldn't have to come up with such a large down payment but if the interest rate is going to be higher, then it seems like one cancels out the other - if that makes sense.

I had this notion that owner financing meant we would save money somewhere, kind of like selling your house without using a realtor.

I can come up with the down payment but it's just going to take another few months of saving.

Beginning to think we should stay on our present course with the farm credit loan.

Pauline

First, let me be clear that I am not an attorney or an expert in land contracts.

I hope that my posts are helpful, and are taken as food for thought. Any time you become a better informed consumer, the better off you are.

What I really want to stress is that you protect whatever assets you have.

I would shop for the best deal I could get on the interest rate and the best deal overall.

What kind of document fees, closing costs are associated with the Farm Credit loan? (These can be VERY expensive!!!!!)

Are there prepayment penalties with FC?

You can be safe with a land contract. I would enter another land contract if it was a decent deal for me, provided I wanted to buy property. It does not worry me in the least.

I just want you to be safe with your purchase, protected legally and understand what you are getting into.

A bank loan can be really tough on a buyer, with prepayment penalties, document fees, hidden fees, high closing costs, 'drag net' collection clauses,
gotcha interest/fees, foreclosure clauses, etc.

There are alot of benefits to land contract. Lower fees, lower interest, it would be harder for the seller to foreclose, simple closing, no "mega lender mentality", etc. You could easily save $4000 in fees alone, maybe more.

I am all for saving money. I just want to be protected when I do so.

Don't be scared of a land contract, just be informed.

Clove

Pigeon Lady · #15 04/02/08, 07:38 AM

Thank you So much. I'm getting a much clearer picture on what to do.

And Janis thanks for the heads up on the 'contract collections' ! I was wondering how it would all be recorded and calculated. I do want to make extra payments and get it paid off as soon as possible.

All the help is much appreciated. I'm much more nervous about this than I was when we bought our farm. With the economy the way it it is I hope we're making a good decision. It's not like this land is vital to our existence but I would sure hate to pass up the opportunity. It's been in the owner's family for over 150 years. We never imagined that they would ever sell it. -Do we have a nail biting emoticon?

Pauline

Rocky Fields · #16 04/02/08, 08:15 AM

Hey.

Since the owner will be financing part of the downpayment, you will have to disclose this information to "Farm Credit" because he will have equitable interest in the property.
I would investigate this on the side because this could be deemed a high risk loan. It might be better to take a "personal loan" from the neighbor, so it appears on the books that you fronted the down payment yourself. He may not want to do this, since their would be no property interest for him in case of default. Home equity loans are harder to get now, but you may have to use that option. Sometimes the interest is cheaper with a bank than a private party.

Get a lawyer to advise you and get everything in writing.

fantasymaker · #17 04/02/08, 02:29 PM

Quote:

Originally Posted by Gercarson

A contract for deed is very similar to an owner's mortgage - both are safe and achieve the same purpose - sale of land and ownership of that land. Only caveat - get a lawyer, record the deed!

Perhaps I should have said "get a mortgage from the owner"
In the places I have been a Mortgage is MUCH different than a Contract for deed and far safer for the buyer.
But the mortgage offers the seller the option of selling it and getting his money lump sum far easyer than a CFD.
Have a local lawyer explain both to you.

MariaAZ · #18 04/02/08, 04:35 PM

I'm not familiar with owner financing in the least, but isn't one possibility that (especially in this market) the seller might be willing to take more of a risk on the borrower than the bank? I've been through bank financing before, and I'm wondering if owner financers generally go through the same steps?

DW · #19 04/02/08, 05:17 PM

ours was owner financed and we went thru a real estate office. Has been pd off for yrs but no problems & great deal.

Batt · #20 04/02/08, 05:49 PM

There is no deal so good that a bunch of dooms sayers or nay sayers can't pick it apart. Negotiate a fair deal, decide on who pays what, and get a real estate attorney to make sure it is what you agreed to. Don't try to get the last .1% or an extra $50. Being that chintzy doesn't help a respectful business relationship. Then pay it off ahead of time. I've done about 4 of these deals, and 1 of them offered to finance my next mortgage since he was cash flush...being as how I had just paid him off.