Owner Financed Property Question?

[calliemoonbeam]

Hi all, glad we're back! Thanks to those hard working guys who saved all our sanity, lol.

I've found a property that sounds great, and it's owner financed. I don't know anything about this, so asked if we'd use a land attorney or what kind of contract would be used. He said "warranty deed, mortgage and promissory note all filed with the county land office". Does that sound right? Is it enough or do I need to push for something more?

He's a retired teacher, well known in the community, so I don't think there's anything shady. He's done this for several other people. They originally owned a 160-acre section, and he's broken off some 10-acre sections, built a home on them and then sold them this way. All I have to do is come up with the first payment and the filing fees, no other money down!

It sounds perfect, but I guess that's why I'm nervous, "perfect" things never happen to me, lol! I think I asked all the right questions otherwise, about the well, septic, taxes (very cheap), covenants/restrictions (none), and zoning (it's agricultural), and surrounding areas. He says there are groups who play paintball to the south and that there are deer hunters on the larger portion of land behind it. Are those anything to worry about? Anything else I should ask or do? Thanks everyone!

[Sawmill Jim]

Sounds right to me .Got the same thing only the bank did it Fixed interest rate would be my concern As far as hunters when you get closer to the country you live an adjust to country ways .

[TnAndy]

He said "warranty deed, mortgage and promissory note all filed with the county land office".


Yep...that IS the way you want to do it....not a "contract for deed".

It sounds like a good deal for you, but it's also good deal for him, likely.....he gets regular payments with interest, and not a big lump sum at one time that throws him into a higher tax bracket. Also, many conventional lenders are reluctant to loan on vacant land, so unless he runs up on a full cash buyer, he would have a hard time selling it otherwise anyway.

This is exactly how we bought our land ( only WITH a down payment ) 30 years ago, and it worked out fine for us.

Get a FIXED interest rate.

[cathryn]

The only thing I would suggest is to talk to some of the "others" he has done this for. They may have some helpful information for you.

Good luck-and I hope this works out for you.

Peace-Cathryn

[Common Tator]

If it sounds like a good deal, I would still have a real estate attorney check it over just to make sure it is done properly and there aren't any unexpected nasty surprises.

[L.A.]

Also called a "contract for deed". Make sure fully understand the contract. I knew a couple who paid for 8 years on a 10 year contract, then had a medical emergency and at 10 days late on the payment the property went back to the owner. They lost all invested and had 24 hours to vacant.
A good investment for the owner.

[calliemoonbeam]

Wow, L.A. and Tator, that's a good point! I'll definitely check that out. I'm hoping he won't have a problem if I take the promissory note to an attorney to look over, and if he does have a problem with it then I'm out! Can you tell I'm skittish, lol? I'm fairly intelligent and could probably understand it just fine, but just want to be safe. The other good point is that the payments are so affordable for me that I could get paid ahead or save up if I want to, just in case, as I do have several medical conditions.

Thanks Jim! It is a fixed rate, slightly higher than the banks are giving right now, but not much, and I don't mind since he's taking the risk. I've been living in the country for the past two years and just love it, just don't have any hunters around here. I won't mind, most of the men in my family used to hunt.

Andy, I had heard of "contract for deed" and didn't know if that was good or bad. I'm glad to hear that he's doing it the right way. It's not totally vacant land. There's a metal building that he started to turn into a house. He says it's all "dried in" with drains in the pad. It's big enough for a 3 bedroom, 2 bathroom plan! That's really bigger than I want, but I can't complain, lol. It has a pond and a creek and is totally perimeter fenced with a gate, but no cross fencing.

Cathryn, I had already planned to ask him if I can speak to some of the others, but that's a good point too, thanks!

Well, I think I may have just found my guardian angel, lol. I've been waiting long enough! I'll check in again tomorrow to see if anyone has any more advice before I go meet him and ask for a copy of the promissory note to look over.

[rambler]

Really what you are looking at is the seller is doing the loan to you, rather than a loan from a bank.

So it is only the 2 of you, not 3 of you (buyer, seller, and lender).

The land itself, you should probably have the same concerns with clear title, proper survey, etc. as you would with any land purchase. If you get a laon from a bank, they will often require all of these checks. In a private sale with no one else involved, it would be easier for you to get taken by not doing a title search, etc.

The only real difference is that you & the seller can come up with any sort of loan arrangement you want between you.

The seller seems to have a package drawn up already; he likely has good terms for himself with slightly higher intrest, and fail-safe deals if you don't pay he gets to keep both the property & the money paid so far.

In return, the buyer often gets less downpayment needed, and can make payments on a property most banks would not work with.

Often the seller depends on intrest rates, and will not accept paying off early - it is to their benifit to have very low or no downpayment. You see, your intrest payments are much higher that way..... Now it's not that he's being dishonest - he is taking a bigger risk than a bank would on this type of property, so he deserves the better deal he's getting.

Paying off early messes up his money flow. Check the fine print if you actually do want to pay it off early as you mentioned?

Nothing wrong with any of this, you are not getting 'taken'. Just be aware of how such things go.

--->Paul

[TnAndy]

Originally Posted by L.A.

Also called a "contract for deed". Make sure fully understand the contract. I knew a couple who paid for 8 years on a 10 year contract, then had a medical emergency and at 10 days late on the payment the property went back to the owner. They lost all invested and had 24 hours to vacant.
A good investment for the owner.

Nope...you are completely wrong there.

Contract for deed is like "rent to own"......as you state, if you miss a payment, the contract is over.....owner simply takes back the property....along with ANY real improvements ( like a house ) you've sunk into it. Most of the time, contract for deed is used when the buyers are kinda "flaky" and likely not to complete the "rent to own" deal, and it saves the seller from going thru the foreclosure expense.

With a true mortage, deed of trust and note filed in the courthouse, you have the security of equity you have paid. THIS is the process described in the OP.

The seller ( just like the bank ) CAN demand the rest of the note be paid at once should you fall behind in payments, but in order to take the property back, they HAVE to go thru foreclosure. Say you paid on a place 15 years of a 20 year deal....say it was 100k to begin, and after 15 years, you only owed 30k.....plus the value of the place had risen to 200k ( easy if you took a vacant pc of land and built a house/barns/fences/etc )....you would now have 170k in equity. At a foreclosure sale ( some places call it a sheriff's sale ), say the place brought a lowball price of 150k. The note holder gets the first 30k ( plus any interest you're behind and attorney fees ) and the deed holder gets the rest.

That IS NOT THE CASE in a "contract for deed".......the person that paid 15 years on a 20 year contract in that case would get NOTHING.

[TnAndy]

Originally Posted by rambler

Really what you are looking at is the seller is doing the loan to you, rather than a loan from a bank.

So it is only the 2 of you, not 3 of you (buyer, seller, and lender).

The land itself, you should probably have the same concerns with clear title, proper survey, etc. as you would with any land purchase. If you get a laon from a bank, they will often require all of these checks. In a private sale with no one else involved, it would be easier for you to get taken by not doing a title search, etc.

--->Paul

You DO need to have a title search done......you SHOULD pay for, and use a real estate attorney on YOUR side of the deal. The real estate attorney can provide you with title insurance for a very low fee, should something arise down the road that didn't show up in the title search, or if your attorney simply screwed up and missed something.

When you buy thru a bank, they usually demand title insurance....but guess what....it ONLY protects the BANK.....the amount of insurance is the amount of the loan, and it goes TO THE BANK if a problem occurs ( which is rare.....and WHY title insurance is so cheap ). Say the bank lent you 100k, and you later improved the property to 200k and inflation raised the price to to 300k.....and "Cousin Johnny" shows up 20 years down the road with an inheritance claim to the property, goes to court and the court says the property should have been his....the bank's title insurance pays the bank whatever is still owed on the original 100k......and you are beat out of the rest.....because YOU didn't have title insurance. THIS is the case for about 99.9% of all bank loans.....the insurance covers THEM, not YOU.

[Old Vet]

I bought mine that way. Once we found out that he soled it to several other buyers I went to the bank and found a better rate and payed him off and now the bank has the mortgage. I found out that he soled it to several other buyers and reposes and made money that way.

[cfabe]

It sounds like he is doing owner financing the proper way, but you should realize that he's going to be charging you a higher rate of interest than you would be paying a bank. With good credit and a fair downpayment you can get rates around 5% these days. I bet he's going to charge at least 8%... that's a HUGE difference over a 30 year loan. On a 100k loan, that would cost you an extra $70k over the loan.

I would suggest checking to see if you can get this property financed through a bank and compare the costs. If you can't get bank financing for whatever reason, make sure you understand all the costs and other considerations of this deal fully before you go through with it.

[mnn2501]

Originally Posted by TnAndy

When you buy thru a bank, they usually demand title insurance....but guess what....it ONLY protects the BANK.

Not true at all. almost a year after buying a home it was found that there was an encumberance on it that the title search did not reveal, the title insurance paid that off, otherwise it would have had to come outof my pocket.

[quietstar]

Callie: Likely in Oklahoma you can get a title report rather than title insurance from a good company and save a couple hundred dollars if that's important. Without a title search, a big Fed. tax cloud and a few other nasty surprises could exist on the title without your knowing.

I'm happy for your country home find...Glen

[chewie]

contract for deed isn't a bad deal if you pay up. we did this on our property, they were really good to work with--paid for all the attny fees, fencing, water turn-on, all the the actual payments. we now own it, no problems. sometimes its just who you are dealing with, but sadly, that is often something a person doesn't find out til *after* an issue! do your research soundly, then be happy!

[calliemoonbeam]

Lots of good points everyone has brought up again, thanks! I talked to him today, and he very agreeably gave me a copy of the "Individual Warranty Deed", the "Promissory Note" and the "Real Estate Mortgage with Power of Sale", plus he gave me the names and numbers of three other buyers he's dealt with. The other buyers couldn't say enough good things about him, and the papers look good to me, but I am taking them to a real estate attorney tomorrow just to make sure. I'll ask them them about a title search or report and insurance also.

The land was surveyed two years ago and has a very nice 5-foot perimeter fence right on the property line. There's also a nice sturdy gate at the entrance, with a fresh looking gravel drive to the house which sits back on the lot, out of site of the main road, which I like. There's lots of hickory trees for my long dreamed of wood stove, too, I can smell it already, lol.

I did talk to a couple of banks today, and they said they would basically consider it unimproved land and wouldn't count the building since it was basically a shell with no "amenities". One wouldn't even consider it, and the other would require a 40% down payment. The interest rate he's charging is only 1% over the bank rate, so it's not outrageous or anything. He said if I want to pay extra I could do that to save on interest or if I even wanted to pay the whole thing off early that would be fine too, saving me a ton of interest.

He said it works just like a bank loan and he couldn't take it back if I missed a payment. There's a clause in the mortgage contract about late fees and how that's handled, nothing about taking possession of the property. It sounds legitimate to me, but again I'll double check with the attorney. Thank you all again so much for your help! I knew I could count on the wise heads here at HT to help me fill in the gaps.

Glen, thanks for the kind words, they're much appreciated. Hope your Texas paradise is working out as planned.

[just_sawing]

One thing that doesn't get mentioned. If the owner goes into bankrupt the property becomes a part of his mess and will be settled to pay his debts..

[quietstar]

Callie: On the surface, it appears he is placing himself in a position similar to what a bank would do. My practice would be similar, except my interest rate would be higher so that I would have a more attractive note to sell if I chose to raise cash.

One of my future concerns is serious inflation resulting from so much money being printed and injected into our economy. The folks that owe on a homestead find how nice it is to pay obligations with cheaper and cheaper dollars. Who said there isn't a bright side to this mess...Glen

[TurnerHill]

Originally Posted by just_sawing

One thing that doesn't get mentioned. If the owner goes into bankrupt the property becomes a part of his mess and will be settled to pay his debts..

No, the note "becomes part of his mess." The titel to the property has already been transferred.

That is the fundmental difference between a seller-held mortgage and a land contract.

[calliemoonbeam]

Well, the attorney today said it looked very good to him, and he's amazed he's not asking more interest too. He said he's seen contracts drawn up by attorneys that aren't that clear and concise and cover every little detail like this one. He told me to ask the seller if he did it himself or paid someone to do it, but I think he said he did it himself. Like I said, he's a retired teacher, so I guess he must have been a good one. I don't know why he's so generous, but God bless him for it!

Well, Sawing, now you have me a little worried again, lol. I'll call the attorney tomorrow and ask him about that situation, but I sure hope that would never happen. He owns a lot of property (almost all of it free and clear) and seems to have a good head on his shoulders and a very kind heart, so I would hate for something like to happen to him..and to me if it comes to that!

The attorney did advise me to do a title search, so I'm going ahead with that, but assuming it works out okay and he can put to rest the bankruptcy issue, it looks like we have lift-off, woo hoo! If nothing goes wrong in the meantime (knock on wood) and if I put in some more work hours (I'm a workaholic already, lol, but maybe I can squeeze in a few more hours), I think I can have everything ready to move in by early spring!

I had been looking to maybe move to Oregon, which I've dreamed of for years, but just couldn't find anything that was even close to what I wanted and it was all very, very expensive compared to Oklahoma. In the meantime, my son didn't really want me to go and now has a new girlfriend who has two kids, so I even get to play grandma, so I guess I'm staying put. Thanks for the good advice and good wishes everyone.