Potential of Owner Financing
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
- The seller still owns the land until the contract is fulfilled.
- The buyer is responsible for yearly property tax, starting at the time of purchase.
- 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.
- The extra monthly income is gaining interest on the purchase price.
- If the buyer defaults, the seller keeps any down payment and all payments received.
- In the case of default, the seller gets the property back and can resell it to a new buyer.
- The Escrow Company takes care of payments and disbursements.
- Montana Land Buyer Realty will find you another buyer!
Disadvantage of owner financing
- Seller gets her/his profit over time.
- Seller might have to start foreclosure proceedings. Montana Land Buyer Realty can assist the seller should a default occur.
Seller might need the cash before note is paid off.