We’ve been investing in land for a little over a year, but until now we haven’t offered owner financing. We’re about to roll out that option on our current inventory. For those with experience—any tips or lessons learned?
It’s mostly common sense.
Down payment matters most
Ability to pay. Regular income = regular payments. Rough debt to income ratio. Start with assuming everybody spends 90% of their net. Is your payment less than 10% of their net? If you were financing a house the bank would be required to keep DTI under 40% for primary residence.
Reasonable interest rate. Varies by state. Old school is called a 10/10/10. 10% down 10% interest 10 year term. We do this with house sales and will have a balloon when we finance a house rehabber. There are many, many zero interest land contract sellers (we are one) that offer zero interest. If doing that offer cash “Discount” or the difference paid by the consumer can be considered undisclosed interest. $5000 cash or $200/month for 36 months = $7200 = imputed 2200 interest (or so the consumer rights advocate will say). Your loan is NOT a loan. It is Seller Financing. Don’t every say LOAN. You are selling a property in exchange for a promise to pay. May sound nit picky, but different enforcement actions. Do a little research on State complaints. There are lots of bad actors who have brought attention to this.
State in your loan docs that buyer can not use property as primary residence and this is an investment expecting to profit. If primary residence, then all the consumer regulations kick in.
Are you selling on a contract for deed also called a land lease? or a mortgage or deed of trust? Repossession vs foreclosure? But if you’re really worried about default, then consider real underwriting. My favorite source is CallTheUnderwriter.com . We don’t use them as we have a full lending business ourselves and land finance is one part of it.
Stability. How long on job, at this residence?
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Hey @Nicole, thanks for asking! I will say that is a loaded question. There’s a lot to know about seller financing, and for anyone who has done it for a while, they likely have a wealth of lessons to share from their experience.
Is there any particular aspect of seller financing you have questions about? For example, ideal terms, how to handle loan servicing, issues to plan for, etc?
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Use third-party note servicing. You will want to sell the note or pledge it in the future and the future investor/buyer will want to be certain you have been getting payments on time. Third-party servicing will give them proof. Only costs $25/30/month. Below are the names of several note servicers. Below them are people/companies that buy all or some of the payments
People who buy partials/entire payments on your notes-land contracts
Colonial Funding-Southlake TX (Eddie Speed)
Note Servicing Companies (collect payments for notes you are holding)
Jim Hunter
Madison Management
FCI Lender Services (very well known)
Evergreen Note Services
Note Servicing Center
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My name appeared above the note servicing companies. My name is Jim Hunter, I am the one who replied. I don’t buy or service notes.
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Thanks everyone I’ll be keeping this advise in consideration for sure. So far this is what we’ve planned we haven’t gotten that far yet but have more meetings this week to nail down more things down.
We will probably will use Terra Notes for payments and will use a title company to handle the deed & process. Our laywer is drawing up mortgage documents for us.
As far as terms we were leaning towards 20% down 10% interest, with possibly negotiation depending on how long or short of a payoff they were looking for.
What terms do you find work best from your experience. Are you running credit checks?
I have never done seller financing, so I am hardly qualified to give out advice, but if I were to, I would try to structure it like below:
I would try to ensure a note buyer would be willing to buy it in case I ever get into a capital crunch and need to sell it.
Note buyers typically buy at a 20% discount from purchase amount, so I would raise the price 20% for selling on terms if possible.
I would also do 10+% interest, 20% down for 690 credit score, 10% increase on down payment for every 50 point decrease in credit score and 4-8 year term. Shorter term = less risk, but too short = less interest income for buyer. I am not sure if note buyers implement a prepayment penalty.
Keep in mind, this has to be a Deed of Trust. It would be very hard to try and sell a Land Contract. I think you would have to convert it to a Deed of Trust.
Look up videos with Eric Sharaga.
Also, you may want to purchase Seth’s Seller Financing Masterclass
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Hey @Nicole! We started doing owner financing about 2 years ago and it’s been good for us. Here’s what I wish someone had told me before we started:
First off, get your paperwork right from day one. We use a promissory note and deed of trust (we’re in Texas). Had a lawyer set up our templates initially - cost us about $800 but saved us thousands later when we had our first default situation.
For screening buyers, I learned the hard way not to get too excited about someone who “really wants the property.” We require 10% down minimum now, verify income for at least 3 months, and honestly the credit check is more about seeing if they pay their bills than looking for perfect scores. Raw land buyers aren’t exactly prime lending candidates anyway, right?
One thing that’s worked really well for us - we price our owner financed deals about 10-15% higher than our cash price. Buyers seem fine with it since they’re getting financing they can’t get elsewhere. We also do 5-7 year terms max because I don’t want to be collecting payments when I’m 70!
The monthly income is nice but there’s definitely more work involved. We use a simple spreadsheet to track everything and send out annual tax statements. Had to foreclose once - wasn’t fun but the process worked like it should.
What size parcels are you thinking of financing? And what state are you in? Some states are way more landlord/seller friendly than others when things go sideways.
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Mortgage? Not a CFD?