As longtime real estate agents for a land development company, Montana Land Buyer Reality we have experienced the seller and buyer side advantages of purchasing and selling vacant land. Typically vacant land does not have the equity that a bank needs to finance a transaction. A conventional bank loan generally requires equity on the land such as a house or structure that is attached to the land. Or it is willing to finance the vacant land if the buyer is ready to build. Typically a bank will start with a construction loan and then refinance once construction is completed. The bank generally favors land in minor subdivisions where infrastructure is in place.
With vacant land, especially rural undeveloped land without any infrastructure (road development, electrical power, well and sewer) in place requires unconventional lending. The buyer then needs to find a mortgage company that specializes in unconventional loans.
Both of the above scenarios require extra cost to the buyer with origination fees, higher closing cost, extension fees (if construction is not completed during the time of the construction loan) and other miscellaneous cost.
The time and odds of a potential buyer meeting all of the requirements of a lender means that there are less chances for you to sell your vacant land in a timely manner.
How owner/seller financing works
The basic instruments (or documents) of owner financing are a purchase agreement, contract for deed, uniform escrow agreement, reconveyance deed and warranty deed. Other documents include a closing (or settlement) statement, Abstract for title, and a financing and disclosure statement.
The purchase agreement defines the terms and conditions that both parties (seller and buyer) agree on before entering into a contract. The contract for deed allows the buyer to use the property as long as the terms and conditions of the purchase agreement are honored.
The reconveyance deed is signed by the buyer at time of closing and allows the seller to take back his/her property should the buyer default. Typically reconveyance takes about 90 days. The buyer loses any improvement attached to the ground (such as a structure, well or sewer).
The escrow company is a third party that holds all of the documents and receives payment from the buyer and disperses revenues to the seller. In essence the escrow company protects both the buyer and seller during the term of the agreement.
Once the terms of the contract for deed are completed the buyer is issued a warranty deed and clear title to the property.
Benefits of owner financing
1. The seller still owns the land until the contract is fulfilled.
2. The buyer is responsible for yearly property tax, starting at the time of purchase.
3. The seller is taxed on the yearly income instead of a one time capital gain tax. This could benefit a seller that has yearly deductions that might off set the income received.
4. The extra monthly income is gaining interest on the purchase price.
5. If the buyer defaults, the seller keeps any down payment and all payments received.
6. In the case of default, the seller gets the property back and can resell it to a new buyer.
7. The Escrow Company takes care of payments and disbursements.
8. Montana Land Buyer Realty will find you another buyer!
Disadvantage of owner financing
1. Seller gets her/his profit over time.
2. Seller might have to start foreclosure proceedings. Montana Land Buyer Realty can assist the seller should a default occur.
3. Seller might need the cash before note is paid off.
The following information is found on http://www.themortgagebuyer.com/
Selling your promissory note
The process of selling a privately-held mortgage note involves a series of steps that generally take three to four weeks to complete. A chronological outline of the steps necessary to complete the sale of a note is presented below.
1. The note holder begins their initial exploration into the possibility of selling their note.
2. After speaking with potential note buyers, the note holder makes their decision about selling their note, selects the best sale option for them and chooses the company they wish to do business with.
3. The note holder and chosen investor enter into a purchase and sale agreement for the sale of the note. The agreement will contain the sale price, the number of payments sold and who will be responsible for the expenses necessary to close the transaction.
4. The note buyer will complete their due diligence necessary to complete the transaction. The due diligence process normally includes the following:
All pertinent documents will need to be reviewed, including the promissory note, mortgage, deed of trust or trust deed, and the settlement statement from the sale of the property.
A credit report on the borrower will need to be reviewed.
The note holder will provide a twelve month payment history on note, along with evidence when the payments were received.
The note holder will provide a copy of the homeowner’s insurance declaration evidencing that the collateral property is insured and the note holder is named as an additional insured on the policy.
A drive-by appraisal on the collateral property will be ordered and reviewed.
A title search will be ordered and a commitment for a lender’s policy of title insurance must be issued by the title company.
An estoppel letter will be sent to the borrower verifying the note terms and the current outstanding balance on the note.
Just prior to the closing the borrower will be phoned by the note buyer who will introduce themselves and ask a few questions about the status of the note.
5. After all of the due diligence has been completed by the note buyer the closing can be scheduled. It is a matter of good business practice for the closing to take place at an attorney’s office or the title company that completed the title search.
6. At the closing the note holder will sign the closing documents and surrender the original note, mortgage and policy of title insurance.
7. Last but not least, the note holder will receive their sale proceeds from the closing agent via wire transfer or certified check. It is also important for the note seller to request a full set of copies from the closing agent.
Protecting your note
You've sold your property with owner financing and now own a promissory note and mortgage. The monthly payments you receive from the purchaser will provide an excellent source of income. Especially for people who don't feel comfortable investing in the stock market, but want to earn a better rate of interest than the banks are paying. Just like any other investment, however, it is important to know how to protect the value of your note.
Unlike most other investments, the note created when you sell property is backed by specific collateral. Protecting this collateral is imperative to maintaining the quality and health of your investment. As a mortgage holder, you have the ability to protect your collateral built into the mortgage document. Once you begin collecting payments however, it becomes your responsibility to monitor and enforce these provisions. In the remainder of this section, we present some important steps you can take to help protect your mortgage note investment.
Keeping your original documents safe
Promissory notes are negotiable, transferable documents. Safeguarding this document is extremely important. Many times the attorney that handled the property closing for you will keep these documents in their files and provide you with a copy. This can be satisfactory if you are going to maintain an ongoing relationship with that attorney. If not, or if you prefer to keep them yourself, store them in a safe, fireproof box or in a safe deposit box at your bank. Be sure to keep copies of the originals at home for your records.
After being recorded at the county recorder’s office, the original mortgage or deed of trust will be returned to you. It is a good idea to keep this original document with the original promissory note.
Keeping a payment history
Maintaining an accurate history of when you receive each of the monthly payments is essential. It will help prevent any misunderstandings between you and the borrower. It may also help the borrower refinance the mortgage if you have included a balloon payment. Most importantly, taking this step will help you receive the highest cash price for your mortgage should you ever decide to sell it.
Along with updating your payment record each month, you should always deposit the payment into your bank account. This will provide you with a verifiable record of when you received each payment. Another suggestion would be to keep a copy of each check or deposit slip in a file with your payment record. Finally, in the event that you receive a payment after the grace period has expired, keep the envelope the payment was mailed in to help provide proof that you are entitled to receive the late payment penalty called for in your mortgage.
Property Taxes
Making sure the property taxes are paid is an important step that you should take to protect your investment. This will be easy if you are collecting escrow for the taxes. One thing you should do is to make sure that the tax bills are sent to you directly from the tax collector. From that point on, you only need to make adjustments in the escrow payment for increases or decreases in the amount of the tax or insurance.
If you are not collecting escrow it is important that you verify the taxes have been paid. In order to do this you will need the tax parcel number, the phone number for each of the tax collectors and the date that each of the tax bills is due. With this information, you can call the tax collectors directly each year to verify the tax status. If the tax payments are overdue, contact the borrower right away to demand they are paid in full immediately.
Homeowners Insurance
Having an adequate amount of homeowner's insurance is essential for protecting your investment. Always make sure that you are listed as Lender or Mortgagee on the insurance policy and that the policy is written for at least the balance of the mortgage note. From that point on, watch for the renewal notice that will be mailed to you each year. If the renewal notice does not arrive prior to the expiration of the current policy, call the insurance agent to check on its status.
If the insurance policy on the property does lapse, you can still protect your interest by either purchasing a new policy, or adding this property to your existing homeowner's policy. After protecting your investment, you will have the right to demand payment from the borrower and add the cost of the policy to the balance of the note.
Protecting the value of the property
It is the Purchaser's duty to protect the value of the property he or she is buying until it is paid in full. This clause is important because the value of the property is what keeps the Purchaser making payments. If the Purchaser ever defaults and suffers foreclosure, it is the value of the property that should enable the mortgage holder to re-sell without suffering a loss. It would be a good idea to drive by the property you sold on an annual basis at minimum. If you have moved out of the area, have someone you know do this for you. Fundamental changes to or deferred maintenance on the buildings on a property can seriously diminish the value of your investment.
Income Tax Reporting
If the property you sold is a home being used as the Purchaser's residence you must report to them the amount of mortgage interest they paid you during the year. The IRS requires that you provide them with this information by January 31 of the following year. You can generally determine how much of the payments you collected during the year was interest from the amortization schedule of the mortgage.
Late Payments
If a payment is ever late, we recommend taking the following steps: (1) Check the mortgage note to see if a "grace" period exists; if so, you must honor it. (2) If no grace period exists or if it has expired, phone the Purchaser and ask about the payment; insist upon payment; make a note of the date and time of the call and keep this information with your mortgage. (3) On the same day as the above phone call, write a letter that identifies the default and summarizes any action the Purchaser has promised to perform and mail it, certified mail, return receipt requested. (4) If the above steps do not produce the desired results contact an attorney. If mismanaged, trying to cure a default by yourself can cause problems.
A failure to enforce any clause in your mortgage can, over time, establish the precedent that the clause is not binding and has no effect. In other words, actions speak louder than words. Consistent conduct over a period of time, in fact, can take precedent over the actual wording on your contract in a court of law! In short, stick to the language in the mortgage or be prepared to find it difficult to enforce in court. Declaring a contract to be in default and starting the foreclosure process is a serious matter and should be handled by an attorney familiar with the laws of the state in which the property is located. The biggest mistake made by mortgage holders in this area is (1) trying to take matters into their own hands, and (2) delaying the exercise of their rights. Begin to think in terms of foreclosure when the Purchaser is one month behind, not three or four months.
Default
If the Purchaser fails to perform any significant part of the mortgage, the mortgage holder may have the right, after notifying the Purchaser in writing of the exact nature of the default, to declare the remaining balance due and payable. Then, if the default is not the cleared up or the mortgage note is not paid in full, the mortgage holder can begin steps to regain possession of the property. Improvements made to the property by the Purchaser then become the mortgage holder’s property. Defaults by the Purchaser may include failure to make timely payments, failure to properly maintain the property, failure to adequately insure the property, or failure to pay taxes on the property as they become due.
Remember, you are not the "bad guy"...the Purchaser is the one not making payments. He or she can sell the property, refinance the property, or bring payments current. The ball is in his or her court, so to speak. Advise the Purchaser of the available options and of the fact that you are prepared to bring legal action. After an initial phone call and a certified letter, only swift and decisive action taken with the assistance of legal counsel is likely to cause the Purchaser to act. Be honest, firm and considerate. Don't harass and don't delay!
Keep records of all written and spoken conversations with the Purchaser, including dates, times, and what was discussed. You will never know how or when these records will come in handy until you need them but don't have them. Then it's too late! Also, because your attorney will be required to appear in court, it is best to hire one who lives near the property in question. This will save you from paying travel time and other unnecessary expenses.
Reselling defaulted property
The seller (or note holder) gets the opportunity to keep all of the money that the purchaser has invested and the opportunity to resell the property. Montana Land Buyer Realty will relist your property and sell it for you again. Or you can decide to keep it! Depending on the circumstances and length of payments you may find that the property is worth keeping! Or the value has increased!
