- Hey, what's up guys?
In this video, we're going to talk about
the land contract and how it works
for real estate investors.
Okay, let's get started.
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All right, the land contract or another name for it
is contract for deed,
is an alternative to the installment sale.
Now, if you're not familiar with these terms,
I'll just break them down for you.
When you're engaging in an installment sale,
So if I was going to sell a piece of property
in an installment sale to this buyer right here,
what I'm essentially doing with my, my, my property,
when I sell it to them is I'm acting
as the bank on this deal.
So this buyer will pay me money every month okay,
just like you would on a mortgage,
it would come back to me on a monthly basis.
And so I'm carrying the contract essentially,
when I sold this property on an installment sale.
Now in this scenario in an installment sale,
the buyer becomes the title holder
of the property all right.
So, so the property is now transferred
into the buyer's name.
So with the installment sale, buyer owns the property.
Buyer's responsible for it, insures it,
does everything they're supposed to do.
fI anything goes wrong with that property,
somebody's hurt on it, buyer's going to be responsible
because they're the owner of the real estate.
From a seller standpoint, using the installment sale,
well, you can see what would happen if buyer
missed a few of these payments to you.
What do you have to do to get the property back?
Well, you have to foreclose.
Now that foreclosure action can take upwards of six months.
So it could be time consuming for you to do this.
And then you can have other rights that are available,
redemptions for, for, for the buyer.
So a lot of sellers don't like that idea.
And so they, they shy away from the installment sale
and they lean more towards a land contract
or contract for deed.
In a land contract or contract for deed,
title does not transfer to the buyer.
Okay, the buyer does not get title here.
Title remains with the seller.
The buyer receives what we call equitable title, right?
So, so that means they're on, on title.
I mean, they're not on title.
They have this equitable title
in the property via the contract.
So this is a contract you put together
between the seller and the buyer.
And it states that the buyer is responsible
for everything associated with that property.
Taxes, the mortgage, 'cause sometimes, you know,
there may be a mortgage on this property
that you're selling to someone.
So they're, they're responsible for all of that.
But title still remains in the seller's name.
And this is kind of, you know, it's good for a seller
if there was a mortgage on there and they wanted to sell it,
not alert the bank to the fact this property has been sold.
The bank would never discover it
because it's still in the seller's name.
Well, if the seller was smart, they would have it in an LLC.
Now the benefit now of this type of transaction
is if the buyer misses these payments down here,
you don't have to go through the foreclosure process.
You can now move in and go after them
for contract forfeiture.
And what that means is that you bring an action in court.
It's kind of like an unlawful detainer action.
You say that this, this party over here
has not been paying under the contract and now the contract
they've forfeited their rights.
And so now the contract's null and void.
So title doesn't have to transfer back to you
because it remains in your name.
It's just that they now lose their equitable title.
You evict them from the property and you move back in.
You can sell it to someone else.
Now there are some concerns, depending on the state
which you live trying to engage in this,
make sure you consult with a knowledgeable attorney
in your location to make sure you're following the laws,
because this is an area where there's
not a lot of uniformity, meaning that each state kind of
has their own little unique take on this
because they do want to provide some protections for buyers.
For example, in Texas, in Texas they actually,
the buyer receives full title to the property.
Once they record the land contract with the county.
So we'd have to go through a typical foreclosure action
to, to get the property back.
But if you're thinking about doing this,
one of the things that I would recommend
you put in your contract is an acceleration clause.
And what this means is it gives you the ability
to accelerate.
All the payments are due under that agreement
if the buyer defaults.
See, the more protections you can have inside of there,
the better off you're going to be.
Because if you didn't have that
and the buyer started missing payments,
and you wanted to go after the buyer and you didn't want to,
didn't want to take the property or cancel out the contract.
Then you'd basically have to sue for each individual payment
that, that the buyer has missed.
Whereas if you have an acceleration clause and they default,
then you can come in, you can sue
and then you can go after them for everything else.
And this one would only be beneficial to you
in a situation where the property is no longer worth
what it was when you sold it to that individual,
which brings me to my next point
with this type of transaction.
Now, obviously from the seller standpoint,
it's great that you still hold title.
From the buyer's perspective I mean,
you got some risk there because the seller
could go out and re mortgage a property,
get another couple of liens on it.
So as a buyer, you know, you don't know what
the seller is doing and you run the risk
that they could leverage it up.
And then you own this property now with seven liens on it,
and then you have to go back and sue the seller.
So what I would typically tell you is if you're a buyer,
make sure you get that contract for deed
recorded somewhere so that it's on title
and that any future lenders or individuals
are going to know that you have a interest in this property,
that would stand in front of them.
Now from the seller standpoint,
the risk are you going to be as follows.
You got a buyer who's responsible
for paying the taxes on that property,
for maintaining the property.
Well, if you're not paying attention
to what's going on there, they could get behind
on the taxes and then you could lose it
possibly in a tax sale.
They could fail to insure their property
and the property burns down.
And now you've now you've lost your house.
So there's a number of things from the seller standpoint,
just that the buyer's responsible for
that creates risk for you.
The other thing is if let's assume
that the buyer decides they're going to open up
an auto repair shop, which happened with,
with an client of ours.
And this was not in a contract for deed.
This was in a rental contract with an option to buy.
But the buyer of this property, the tenant buyer,
what they did is they opened up a auto repair yard
so to speak on this property, without alert,
notifying the seller, and they contaminated the property,
because they take all the oil and antifreeze,
just pour it in the ground.
When it came time to buying the property,
they asserted the value of the property
was not what the seller thought it was.
It was greatly diminished because
they had committed waste on that property.
And they wanted to buy the property,
say it was supposed to be worth a million.
They said it's only worth 400,000
because of the environmental contamination.
Seller of course sued, buyer wins and they get
to buy the property for $400,000
because seller didn't have the right provisions
in the contract to protect them.
That is why, whenever you enter into this type of agreement,
if you're the seller, you want to make sure
that you have protections from the buyers
committing waste on the property.
- Also, you want to be going out there
and checking it out and ensuring that
that property is being maintained
because title is still in your name.
The other thing, the issue you could run into as well
is if somebody gets hurt on that property,
you know who the attorney is going to sue,
they're going to sue the person that owns the property
because your name is still listed there.
It could potentially drag you into the lawsuit.
So this is another reason why you want to make sure
that this property is held in a limited liability company,
not in your personal name.
So if that were to occur and the buyer creates
some type of a risk on that property
that rolls back up onto you because someone's injured,
that you've limited your liability exposure.
These types of agreements that can be really great
in the right situations, but you have
to appreciate the risk in going into it.
And that is why if you're thinking
about using a contract for deed,
make sure you find a knowledgeable attorney in your area,
in your market, that can then walk you through
what the legal requirements are
to put this thing together the right way
so that your interests are protected.
All right, guys, that's it.
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Take care.
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