Financing homes and land contracts, part 2
As we discussed last week, land contracts have one huge difference from cash or bank financed sales — the seller has risk after the sale’s closing.
If the buyer defaults (doesn’t pay the mortgage), the seller still has the house and is not getting money. For this risk, most sellers expect to be paid a higher interest rate. This is usually accounted for in both a higher interest rate paid to the seller and specific terms that might allow the seller some control over the house until it is paid off. These terms might prevent the buyer from making substantial changes to the house, or have a higher penalty if the buyer is late in making a payment.
The point here is that all of these terms must be written into the land contract and must be recorded. We will have more on recording later.
For a buyer with less than stellar credit, a land contract might be the only way they can buy a home. By offering a higher interest rate, or some more invasive terms such as agreeing to make certain improvements or not changing the home until the land contract is paid off, this might be his / her only option to get financed. Sometimes a home might not qualify for a mortgage.
In typical bank financing, a home is appraised. The appraiser would note if the home was not habitable, maybe needing a new well or septic. FHA loans require that there is no peeling paint and has safe stairways. If a buyer and seller agree that these conditions exist and how they will be fixed, a land contract might be the right way to sell the house. Both must agree to these terms, and they need to be spelled out clearly in the land contract document.
Looking back at typical mortgages, one absolutely consistent thing is bank mortgages and notes are not only thorough in spelling out the terms, they are signed and recorded in the county recorder’s office and available online for everyone to see. Mortgage companies do this to put the public on notice that they are owed money, but this benefits buyers by assuring the banks cannot arbitrarily change the terms both parties agreed to. The seller is assured the buyer cannot sell the house without paying off the mortgage, and the buyer is assured the seller cannot take the house back and sell it to someone else. This public recording is a feature of bank mortgages and it should be required of all land contracts.
So as discussed last week, land contracts and their buyers and sellers need professional help from both Realtors and title attorneys. They need it for a number of reasons. First, Realtors understand home values. While we aren’t appraisers, we understand pricing and know if a home is priced properly — therefore agreed upon prices are not unusually high or low. Next, we know that home inspectors are absolutely necessary to determine the condition of a house. The last thing an honest seller wants to do is portray a home as something it isn’t. This doesn’t mean a home should be perfect, but clearly both parties should understand the current condition.
Lastly, a title attorney should be engaged to make sure both parties understand and write down the terms and they are all legal. The title attorney will record the documents at the county recorder’s office so that both the buyer and seller are protected.
Next week, we talk about the dark side of land contracts. We talk about the way that unscrupulous sellers use the land contract as a weapon against buyers, and how they can protect themselves from being taken advantage of. Stay tuned.
This article was provided by the Warren Area Board of Realtors.