Land contracts, mortgages, and stuff

Factual Questions
1

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!

2

[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:

  1. 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).

  2. 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).

  3. 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).

3

What bank would give you a mortgage on only part of a house? Why would a bank want its collateral so burdened and compromised?

4

If your buyer gets a mortgage from the bank and you take a second back, then the buyer is now the owner and what you have is a second, subject to the bank’s first.

You will then hope to collect payments from the new owners. If they default, you can foreclosure, and depending on the terms of the first mortgage and state law, you will either have to payoff the first or you may be able to assume it.

If the bank foreclosures first, then if you wish, you can bid on it and as above, may or maynot have to pay the first off. If the winnering bid is above the first and foreclosure costs and not you, then you get the difference up to what is owned you.

As a practical matter, if the buyers have paid none of their own money down and stop making payments, you should probably forgot your part, it will probably be worthless.

Some people think a bank makes money when they foreclosure on a home. It does happen, but seldom. Usually they are damn lucky just getting their money back, more often than not they are the “winner” and end up owning a property that has been deliberately ruined by the previous owners.

5

Per RD’s excellent notes a “land contract” has nothing to do with your described scenario. You are essentially describing carrying a second mortgage, and that has a risk/reward curve you will have to analyze for yourself specific to your situation.
You will be in second postion in virtually any deal a bank is willing to do with the buyer where you are holding part of the financing.

6

No offence, but most everything Roland Deschain said was either wrong, or really jumbled and has little to do with answering your question.

A land contract has the seller holding deed to the house until the amount owed to the seller is payed up, upon which time the seller gives over the deed to the buyer. Since this is the case, no mortgage company would allow you to do this and then go ahead and finance the rest of the house. The reason was haphazardly touched upon… no mortgage company will let you hold first lien position.

As for you putting up the money for a 2nd, it’s possible , but it’s not going to be a secret to anyone… You have to prove to the mortgage company where you got the 20% from when you’re a buyer. If that money isn’t in an account at least 3 months before closing, the bank wants to know where it’s coming from. The reason for this is simple… that’s one more payment this buyer is required to make, and it goes towards their debt to income ratio, not to mention their CLTV (combined loan to value… not to be confused with LTV which is just the amount of the 1st mortgage compared to the value of the home.). You can write up a gift letter, but at that point, you better trust the guy you’re selling the house to, because he’s no longer legally obligated to pay you back.

And to answer your question about foreclosure, odds are you’ll be screwed. In the event of a foreclosure, This site says it more succinctly than I can. From that site;

Oh, and the going bank rate for a first mortgage with a down payment of at least 15%, is 6% to 7% if you have perfect credit. However, if you go to the bank, and get a first and a second, the rate for the 2nd will most likely be 10% to 12%, and that’s also with perfect credit.
The motivation for the seller to provide a low rate is money where there was none… the only reason to jack up the rate higher than a bank would offer is if the buyer absolutely couldn’t qualify with the bank. Otherwise, the seller would be wise to give 5% or 6%. Why on earth would a buyer want to go into contract with a private citizen at a higher rate than a professional bank?
Anywho, as that site suggested, (and I agree) if the guy puts up nothing, then you are taking a massive risk. If he forcloses in the first year, the odds on seeing your money again are slim to none.

Hope this wasn’t too long winded, but you asked a multi part question. Hope it helps.

7

“Preview post” wasn’t working, so sorry for the simul-posts.

Just wanted to touch upon this

It never happens. It’s against the law. If it were legal, then mortgage companies would be in a position to give loans on homes they know would foreclose, then sell them and make a profit. It’s a big no-no. They are allowed to cover their fees (legal and otherwise) and the remaining principal on the house. That’s why foreclosure auctions can really get you a deal… you can get a house for whatever the remaining mortgage on it is.

8

Thanks everybody! Mostly what spurred the question is that the buyers’ agent specifically said “land contract” which is why I didn’t really understand what the heck was going on here.

I don’t imagine they could take out an 80% second could they, while I were to maintain the first at 20% (hell, that’d be super easy – I could keep the current mortgage that has no due-on-sale clause [V.A.] [well, it does, but land contracts are excluded]).

Really, I think I’m done considering it. Sounds too risky.

[quote=The_Llama]
Oh, and the going bank rate for a first mortgage with a down payment of at least 15%, is 6% to 7% if you have perfect credit. However, if you go to the bank, and get a first and a second, the rate for the 2nd will most likely be 10% to 12%, and that’s also with perfect credit.
[/quote
My current second is only 8.25%, and that was 100% LTV. Actually I close on my new house next week. We did 80/20 at 6.125%/6.375%, nothing down, and seller’s paying 3% towards closing and pre-paids (which is more than we’ll need). And that’s without a contingency on selling the current house. The rates are only that high because, like you said, it’s 100% LTV. That doesn’t mean I’m not in a hurry to sell the current house, though! And trust me, I’m not rich by any stretch of the imagination. In fact, you can see me shopping at [Wal-Mart]
(http://boards.straightdope.com/sdmb/showthread.php?t=252843&page=3).

9

Geez, when did you lock in that second, and with whom? I don’t have an 80/20 that will even come close to that.

10

A couple of points:

1 You said: " don’t imagine they could take out an 80% second could they, while I were to maintain the first at 20% (hell, that’d be super easy – I could keep the current mortgage that has no due-on-sale clause [V.A.] [well, it does, but land contracts are excluded])."

a. Purchase money second mortgages without the same company getting a concurrent first mortgage are rare, but not totally out of the question. However, the company would want really high credit scores (700 plus) and rock solid appraisals (which would probably be reviewed). In addition, this would usually involve a subprime type scenario or working with a small bank or credit union.

b. I haven’t done a mortgage since 1998. However, even then I was able to do 80/20 purchase money deals at around 6.875% on the first 80%LTV and 8% or on the final 20% of the money (with good credit scores). Rates are much better today.

  1. Here’s an option if you don’t need the money really bad. Why don’t you consider offering him a land contract. If the guy has tainted credit (but you consider him to be a good risk, after all there are many people out there who have hardly even paid a bill late in their entire lives, but still have credit scores in the low 600’s or even lower) this could be an option that he might consider. You would want some down payment (even if it is a few thousand dollars) and you would want an above market interest rate, and or selling price. Here’s a possible scenario:

Buyer with impared credit score (but good job, and acceptible credit history to seller) wants to move to a “better area” of town, and or buy a better house. He is therefore willing to pay 150K for a house that would sell for only 135K or so to an “average” buyer in the area. In addition, he is willing to pay 8% interest on that money (he is only required to put three thousand of his own money down by the seller). The buyer gets to live in a house and neighborhood that he would otherwise have to wait years to qualifty for (or pay thousands in fee’s and an even higher rate to a subprime lender IF he was even aware of this option). The seller gets an above market selling price, and higher than market interest rate. Obviously, you should still consult a real estate attorney. Also, in many jurisdictions if the buyer “breeches” the contract you can simply evict him rather than go through foreclosure. In addition, if you consider this approach you would want to pay the property taxes yoursel to ensure that it is done. In addition, you would want a clause that if he fails to maintain the property or encumbers the property with liens such as mechanics liens (for instance he puts in central air or builds a deck but doesn’t pay the contractor) that this constitutes a breech. You could even put an “option”/baloon " provision in the contract that he must exercise within a defined period of time.

Keep in mind that the mortgage on the property will continue to burden your debt ratios and impact your credit score (usually in a positive manner if it is paid on time). You may also wish to carry liability insurance on the property in your own name since you could be held liable for injuries/torts ect that occured on the property while it is being sold on contract.

11

Could you please give me a cite for the first few claims? It’s contrary to my experience. I worked in the mortgage loan department of a S&L for more than two decades. May I ask you, how many foreclosures have you actually attended, prepared paperwork on etc? My total experience is not great perhaps few dozen in some way or another.

In regard to the mortgagee making a profit, it’s rare an owner will let a property go all the way to a sale thru foreclosure if there is equity. Usually the mortgage holder has an employee or their lawyer to make a bid at the sale, often they are the only bidder–in which case they are (usually) like any other successful bidder, the bidder is the owner, period.

12

Actually many jurisdictions such as North Carolina have passed so called “predatory lending” laws to combat this from occuring. The practical effect of these laws is to limit maximum debt ratios, and frequency that someone can qualify to refinance (and to limit fees being rolled into loans). In my experience as a mortgage broker, real estate appraiser and public records researcher it is indeed a rare day for a bank or mortgage company to make a profit on a foreclosure. In fact, the bank often finds that the the property which appraised for 150K at the time the loan was made, is really worth something like 135K even after a few years of appreciation (and that’s if they used a fairly honest appraiser). In addition, I have seen many borrowers max out credit cards, get 100% LTV financing, AND maybe a 125% loan (do they still have those?) and then file a chapter seven BK! One guy I spoke with (I was trying to finance him out of foreclosure, but he wasn’t interested) said that he looked at the eighteen months that it would take to foreclose, and then evict him as a mortgage/rent vacation.

13

aahala you bastard. I got this info from my boss. He has 10 years experience as a branch manager for a mortgage company. Why are you a bastard? Becasue I went to him and I was like, hey, remember when you told me that it’s illegal for a bank to sell at a profit…? And he’s like, I never said “illegal.” You can imagine my feelings of stupidity. (sigh) He did say it, though. I swear he did. dammit :frowning: Anywho, we got on the topic, and (without specific backup) he said that local banks shouldn’t do this. As in, they’re required to go through a whole process to keep the forclosure from even happening in the first place. And then, it looks really really bad for them to have their assets tied up in a property, so it’s in their best interest to get rid of it as soon and as easily as possible, with the smallest net loss. This is from a link on the HUD website

Banks want to get rid of real estate for the following reasons:

REOs represent their bad loans
REOs are illiquid assets. Banks deal with cash and need to maintain liquidity. They are not in the business of real estate.
Federal and state supervisory agencies set minimum limits for cash requirement

REO stands for Real Estate Owned (by the bank in this case)

In other words,

is exactly correct. On a state by state basis, some predetory lending laws might prevent this, but I couldn’t find anyplace that mentioned it specifically.
Also, the boss said on the federal level, banks can kind of do what they want. So it’s possible that if a federal bank forecloses on your house, they’re not subject to normal laws or even practices. Damn you. I’m a schmuck.

14

Llama, don’t feel badly. We all get feed a line from time to time to our possible embarrasment. I generally agree with most everything else in the thread.

I got a kick out of your last post because it reminded me of a time where our institution actually did make some money out of a foreclosure.

Don’t recall the figures, but the situation was like a $120,000 home(at the time and location a pretty nice house) with a $80,000 loan balance. We possibly made about $10,000, as we were the only bidder, and as you said, we wanted to get rid of the property out of RE Owned and sold it very quickly because we priced it a lot lower that market.

Here’s the kick - the husband and wife owners were so mad at one another, both had contacted us, asking what would happen if payments stopped–how would the money be split upon foreclosure and we explained the process etc.

Much to our surprise, both individuals stated the SAME thing to us independently–I don’t want that “bastard” to get a dime, I don’t care if I get nothing, and we strongly advised a number of times over several months of non- payment that they should sell it before we foreclosured, otherwise they might get nothing. And that was just fine with each, as long as the other didn’t either.

So the “bastards” each got what they wanted, and I had a story to tell.

15

Wait! Since this means that the bank could keep the money on a profitable sale, does this mean they don’t come at you for the difference if sold at a loss?

I could save myself a lot of headaches by just abandoning the house rather than selling it. Hell, I’ve got working car, already got my mortgage on the next house, and don’t really need to use any credit cards… so I guess I can just kiss my credit goodbye for the next seven years or so! :slight_smile:

16

At one time that would have been the case (they would come after you for any deficiency balance, but you could file a chapter 7). However, credit scores have gained usage outside simply granting credit. In many cases the rate you pay on your auto or home owners insurance is determined as much by your credit score as your driving or claims record.

Most people who ruin their credit due it out of unforeseen circumstances or recklessness. However, if you had excellent credit to begin with and wanted to ruin it on purpose you could probably make alot of money and not be prosecuted for any crimes. Heres one possible scenario:

  1. Buy a home for next to nothing down. Then take a so called 125 LTV mortgage (if they are still offered) so that you will have some amount of “cash” in your pocket.

  2. Then obtain as many credit cards as possible. If you have a good income you can be granted a rather high aggregate credit limit. At one time my wife and I had over $300.000 in combined avaiable credit.

  3. Max out that credit line with cash advances (often limited at 50% of the actual line but not always). Put the cash in the “mattress”.

  4. Pay the minimum for about three months, then start going late. Eventually after a year or so you will pay nothing or a ridicuously small amount to each card (however that is enough to delay them from suing you for at least several years).

  5. Several years later the credit card companies will sue you. If you stop paying your mortgage the company will begin foreclosure which will usually take anywhere from twelve to over twenty four months until the time of eviction (during which time they would refuse payments even if you tried to make them).

  6. Then and only then do you file a Chapter Seven years after the initial cash advances. If you were “frugal” with the original mattress money you could have well over $125.000 in cash left for your troubles. You could then begin to “rebuild” your credit and within about five years be an above average credit risk.

  7. The only difference between you and 99% of the other people who file BK’s is that you would actually have something left to show for your troubles. That is to say most people who file BK’s on hundreds of thousands of dollars simply squandered the money.

  8. I presented this scenario to a childhood friend who is also deputy prosecutor in this county and he indicated that it would be impossible to prosecute especially if you didn’t file the BK for several years, and made minimum payments for awhile.

Of course it is also morally bankrupt. It is also just one more reason that we need to pass the Bankruptcy reform legislation which has lingered in conference committee for over two years now. This legislation would require that most people file Chapter 13’s rather than Chapter 7’s, and would have to pay on the debt for at least several years. While not perfect, it would address the most wanton abuses.

17

Why would they refuse payment? It seems like they’d want something, especially considering that at a 125% LTV they’d be turning out the loser.

As for the rest of it, I always thought that if things got bad and I lost my job, I could do essentially this, and just disappear in Mexico right aways without even the pretense of trying!

18
  1. I think there are legal reasons inherent in the foreclosure process for refusing payment. Generally, we are talking about a first mortage lender here. Since under my “hypothetical scenario” you would pay the “125” mortgage to a different lender (this mortgage in not central to the scenario in any case). In any case there would be no reason to pay them if you were intent on them foreclosing. Not paying wouldn’t expedite the process on their behalf (you would still have 12 to 24 months before eviction on average). In fact, when I used to work with clients that I was trying to “finance” out of foreclosure, one of the things I told them was to “put away” the mortgage payment money that was being refused by their lenders. Many times people would miss a payment or two, and their lenders would “stop” taking payments (unless they made up the deficiency which they couldn’t all at once). Many people would say “I could afford my orignal $700.00 a month (or whatever) but my mortgage company will no longer take that amount.” There were several reasons for my saying to save this money rather than just wasting it which is what they often did:

a. It might be a useful “tool” to induce the current lender to “reinstate” their current mortgage with a lump sum payment.

b. It might be necessary to pay for appraisals, ect in trying to get them a NEW mortgage to get them out of foreclosure.

c. It might be useful in paying the filing fee for a chapter 13 BK which can in some cases facilitate keeping your property.

d. IF nothing else an extra ten grand or so (the average amount they would save in “mattres money” over the rent free foreclosure period) would let them obtain an apartment for their family to live in so they could avoid being homeless!

19

If the bank bids the amount of the loan payoff and foreclosure costs(or more), then they can not go back to borrowers for a deficiency. Doesn’t matter then what the bank ends up selling the property for.

Generally, if the bank or anyone else “overbids” the payoff and fees, then the difference goes to the borrowers. Some states may require the difference be paid to junior lienholder. There’s hardly any legit reason for banks to overbid and this might make them liable to a lawsuit by the borrowers, or someone who claimed they were shut out.

If the bank “underbids” or fails to bid at all and allows another to unbid, then they can file for a deficency against the borrowers, but in practical terms trying to collect is nearly useless. If the borrowers couldn’t/won’t make payments, they aren’t/can’t pay a deficiency. The deficiency for the bank is the amount of the unbid, not the loss incurred once they sell the property.(Lawsuit possibilities again)

In my company’s experience, we tried to judge what we might clear on the property if we were the “winner”. If it was less than the loan payoff and fees, we waited to see if someelse would bid and if that bid was near what we thought we would get, we wouldn’t bid at all, and writeoff the difference and go home.

All of the above subject to state laws. YMMV.

The VA and FHA have set rules on the amount the bank should bid on their loans, and if they want to deviate from that, the bank must get that agency"s approval before the foreclosure.

20

Also, don’t flee to Mexico for several reasons:

  1. It is a country which is easy to extradite from.
  2. Such a flight would provide just the sort of evidence needed for intent that would be needed to prosecute you (although you still probably wouldn’t be).

3 Instead, consider buying a nice thirty five foot cabin cruiser (price used around 50K equipped) and head for Fiji, Bora, Bora or maybe Nevis or the Caymen Islands (not that you would need to flee and in fact doing so would be ill advised).

  1. Also, credit scores are very sensitive. Thus, you would need to “advance” the money over a relatively short period of time (best to use the balance transfer/ cash advance checkes they are always sending to you anyway).

  2. Also, it would be better to do this before you lost your job since this would provide further evidence of intent.

  3. If you did it after losing your job at least make a stab at starting a “business” (one which didn’t cost much money to start) so you could make the pretense of having legitimate intent. Indeed, many SUCCESSFUL businesses have in fact been started with money “advanced” from credit cards (Donald Trump uses junk bonds regular folks use credit cards).

  4. A few trips to Vegas to support claims of a “gambling habit” wouldn’t hurt. Since the court has no problems with you squandering the money, it’s intent that could get you in trouble.