Do you really want to be a finance company? What if he defaults? When my inlaws were selling their 2nd home on the Vineyard, the prospective buyer wanted my FIL to do owner financing. My FIL said that since he was in his late 70's, he was not comfortable doing this - and he was a retired banker. He was awfully glad he did as the guy ended up losing the house and the bank foreclosed. He would have been in a mess that would have been time consuming and he could have lost a lot of money.

What Denita says...

I've done this before, and it was a big advantage for me getting 7% return when everything else was about 2%. Of course, being cautious and from a family of attorneys, I used one to draft the documents and checked out the buyers well. I was sad when they paid me off early. I would never consider doing such a thing without protecting myself. If buyers default, the land comes back to me as well as the down payment that I already have. I don't see that as dangerous. Being retired, I do like the idea of an annuity with a good rate of return. However, I am not stuck on doing this. Just tossing around the idea in the event it takes too long to sell. And I'm fortunate there, too. I'm in no hurry. Taxes are low! Thanks!

Gracie Morgan, I agree with your thoughts. It may be to your advantage to offer financing. As you said, worse case scenario, you get back the land?

Only disadvantage for you is having your money tied up on this property, but if it is difficult to sell this may help you. The additional monthly income is nice too.

I am a bit confused by your original question. You say, "I'm wondering if a buyer would be able to build without paying me off first." Then later you say, "If buyers default, the land comes back to me as well as the down payment that I already have."

The only way I see that the land and the deposit can come back to you, is if you are using a land contract rather than holding a note with the property as collateral. If that is the case then the buyer can't build on it anyway as the title remains with you. In most situations where you are giving up Title you are also giving up the dispossession benefit.

bry911 - Thank you for your response. That is the type of info I was hoping to flush out of the Houzzers. I knew I was missing something. I haven't even put the land on the market yet, but it seems useful to explore all options before I do. I'll use and attorney, one way or the other. But I don't won't to wait until I get an offer to understand these options.

I read your comment as "when selling I receive the buyers down payment (deposit), since I am financing the balance, I'm receiving monthly payments. If the buyer (now owner) defaults, I keep that down payment (deposit) and the property returns to me.

If you sell with owner financing, you no longer own the property, you only own the mortgage with rights to foreclose.

What would be the advantage to either party to instead form a land contract instead?

If you sell with owner financing, you no longer own the property, you only own the mortgage with rights to foreclose. What would be the advantage to either party to instead form a land contract instead?

In most states you can't simply repossess someone else's property in satisfaction of a lien on that property. You must go through the foreclosure process and first attempt a trustee sale or auction on the property. If the property sells at the auction you must submit a full accounting of money received, money owed and reasonable fees for the foreclosure process, some states will limit those fees to arms length fees only. There are strict timelines regarding disclosures and procedures when doing a foreclosure. Further, some states require you to show evidence of actively attempting to sell the property for an extended time.

Most of these costs are lessened and the strict guidelines are relieved in a contract for deed (land contract). A "foreclosure" on for a land contract is essentially the same process as an eviction, which is much less costly and much more seller friendly. In many ways, a land contract is a lease with a bargain purchase option (of zero dollars). A buyer's interest in the property is protected by the contract he has with the seller rather than by the deed that is filed. So in most states you can simply repossess your own property (land contract).

Land contracts are very safe for sellers and risky for buyers. As the seller has the deed, and the contract that transfers the rights and privileges of ownership are not recorded with the deed, the seller can use the property as collateral. In other words, they can get a loan and a lien on a property they don't really own anymore, because the protections afforded the buyer are not made part of the public record.

ETA: I am oversimplifying this a bit to make it readable. There are some nuances to each that I glossed over, but the general idea is intact.

ETA2: Edited for clarity

Bry911, please read my post (you quoted me) I stated "rights to foreclose", not repossess, why are you addressing repossess?

cmarlin can you explain what you think the difference is between the two rights to foreclose vs repossess?

please read my post (you quoted me) I stated "rights to foreclose", not repossess, why are you addressing repossess?

You asked,

If you sell with owner financing, you no longer own the property, you only own the mortgage with rights to foreclose.

What would be the advantage to either party to instead form a land contract instead?

The advantage to the seller for a land contract is the right to repossess (a.k.a. evict, dispossessory action, detainer) instead of having to foreclose. I addressed repossession because that is the advantage afforded by a land contract and not afforded by a secured loan.

The additional advantage is there is usually no requirement to attempt liquidation and settlement. The buyer has no equity position in the property in most states (some states require transition of land contracts to mortgages when 75% complete). Therefore, no trustee sale, no settlement, etc.

The disadvantage to to seller is that no one with good credit and money is going to want to deal with either situation. They will already have their pre approval and don’t need your financing.

The only people who will find any of that advantageous are people with little money for down payments and mediocre to poor credit. That’s a headache that no one who wants a reliable income wants to deal with.

Better to sell outright and invest the proceeds.

In my opinion, there are three times when a contract for deed is a good idea, (1) it is a related party transaction (this is especially useful for farmland), (2) it is for an amount small enough that getting a loan is more trouble than it is worth, for example, carrying $10,000 of financing on a $15,000 piece of land, (3) you are trying to take advantage of unsavvy buyers. Unfortunately, they are a preferred instrument for number 3.

They are inherently unfair, as there are so many ways the buyer can get screwed. Getting to the end of the land contract and finding out that there is lien on the property, thus it can't be transferred, happens regularly. The number of buyers who have to clear up tax liens after a land contract has to be staggering.

As an investment, a land contract on raw land has to be one of the best returns available. Essentially they get equity investment returns on debt instruments that have zero risk. I mean the cost of a dispossessory action is a few hundred bucks (under $500 in my area) and only takes a couple of weeks on property without a residence.

Also, while I don't like them, if I got talked into carrying the financing, a land contract is the only way I would do it. However, I will avoid carrying the financing if there is any way possible.

ETA: As a buyer, I would avoid any seller offering a land contract like the plague.