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?
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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