[QUOTE=Balthisar]
Potential greed thinking here – if a buyer of my hosue (for example) wanted to secure a normal 80% mortgage loan, and was wanting me to “hold back” the rest (20%) as a land contract, how does this work? I’m always under the assumption that a land contract doesn’t transfer the title.
So I’m thinking the buyer’s bank would have a lien on what would still be my house, sticking me with the responsibility of selling the house if they forclose.
Or, would this really not be a land contract, and I’d be carrying the second? I ask because I can easily finance the 20% at 5 to 6 percent, and probably charge up to 10 to 12 percent on the land contract.
But then, maybe I hold the lien on the 20%? Or the mortgage company owns the lien on the 20% and all I own is absolutely nothing if they default?
I guess I’m not asking for specific legal advice – if I want to pursue this, I will most certainly hire a lawyer. But I’d like to know what’s “normal” for this type of thing – am I looking at an easy investment, or a potential losing-my-shirt kind of thing?
THANKS![/QUOTE
The following points may be relevent to your situation:
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Generally, the situation you describe involves a second mortgage rather than a land contract. Indeed, the primary advantage of a contract for the seller is that
in most jurisdictions he/she does not have to go through the foreclosure process to reclaim the property (although you might still have to evict the person).
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However, in this situation you would be in a secondary position to the first lien holder (the bank). This means that if the buyer stopped paying you (or otherwise defaulted) then you the bank would have to be repaid (with there fees) before you saw any money. Generally, first mortgage holders “inflate” their legal costs ect to the point where the second lien holder sees little money from a foreclosure sale (where the price is often below general market value anyway).
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Normally, a seller would consider the deal you describe under one of the following circumstances:
a. They are motivated to sell quickly.
b. They are getting either a “high market” value or above average interest rate for their trouble. Thus, if you can sell the property for 100K when you otherwise could only get 90K (without taking back a second) this might be good reason to consider this approach).
c. For someone with good credit six to eight percent is the going bank rate for a hundred percent LTV second mortgage. Under the circumstances that you describe many people would want a higher rate to compensate for the risk/trouble (or higher price on the property, quicker sale ect, cetaris paribus).
d. Consult an attorney with experience in Real Estate law. It is likely that a second mortgage (or at least a recorded contract) would be preferable to a contract in this situation. That is because you want to avoid (at all costs) being in THIRD lien position (thus if you didn’t have a second lien recorded, the buyer could accumulate additional liens, ie mechanics ect, compromising your postion).