I'm not sure if anyone has ever heard of such a scenario, but if a buyer had built something of value on the property (e.g. a home) that cannot be moved, then how does the land contract work if the buyer defaults?
In a RETipster YouTube video, Seth talks about the Dobb Frank act which added a bunch of restrictions to seller financing, but a loophole for vacant land is that the act specifically mentions residences. Seth said that one way to avoid that gray-area might be to have in the seller financing contract to not allow any home to be built until the land is paid off. I guess this would avoid the titular scenario of the buyer defaulting after building a house, but isn't the most common reason for your buyers to buy land in order to build a home on it? Why would they want to wait years to do that after starting the contract?
Basically, I'm trying to figure out the best way to do seller financing that avoids scenarios that can screw the buyer (or I guess the seller in the event that the buyer used the land as a trash dump or something else that ruins the property).
The Dodd Frank aspect is more about vetting the buyer to avoid predatory lending.
If your buyer builds then defaults you would simply foreclose on the property. Your contract should state something about improvements.
This will almost never happen because banks very rarely will give a new construction loan unless the land is paid off. Unless of course they build with cash, but if they had that kond of cash they would probably pay you off no?
In my contract I state that the buyer must request written permission for material improvements.
Having them invest in improving the land is a plua for us since this usually will guarantee they pay off the loan, or at the very least leave the property in a more marketable shape for the next buyer.
@jawollbrink Thanks for your input. I have a couple of questions on this topic too since I am fairly new.
are the banks still going to refuse lending to a borrower if the ownership document is in the form of a deed of trust or mortgage?
can this "request written permission for material improvements" be added to a deed of trust as well?
for our specific business, isnt the dodd-frank act basically a lot about restricting seller financing for real estate property to only licensed loan mortgage originators if either of the following conditions apply:
if the loan term is more than 6 years
if there are no "dwellings" constructed within the loan term
Looking forward to your thoughts, especially on strategies on how to work around this law. Thanks!
I have only done land contracts, but my lawyer said that the Dodd Frank would not be a problem. I would suggest seeking case specific legal counsel
As to building loans, they are hard enough to obtain, and as a general rule banks require the land to be owned outright, for collateral.
People buying a no credit needed lot from you on payments most likely will not have the credit to get a construction loan.
But to the original poster, there is a chance that they build sometjing with cash, maybe put in a driveway, clear the land, or build a cabin. If they dont pay then you would forclose on the property and any/all improvements. This should be in the details of the contract.
@jawollbrink thanks for helping put it in perspective for me. Logically, you're right it doesn't make much sense that they'd be building a house but not affording to pay off the land. And good point about banks and construction loans.
Thinking about it, a more-likely scenario might be that an older couple buys a couple acres of land from you on terms to be paid off in 5 years, and within that time they incrementally build a driveway, clear the land, do some leveling and landscaping, install a power pole, install septic, install a well, build a storage shed, chicken coop, etc., while living full-time in an RV in this little spot they now call home. But then one of them dies or becomes incapacitated in some way, and it happens to be the one who was making payments on the land. 60 days elapse while the spouse is dealing with the aftermath, and (as per the contract) you as the seller perform a non-judicial foreclosure and take back the land, improvements and all. Sure, as a reasonable person, you'd probably check on them to figure out why they haven't paid and try to work something out. It just seems a bit unfair if the buyer is simply relying on the seller to be a decent person. Maybe I'm overthinking this.
@AJ-Chiongbian I'm not a lawyer, so take what I say with a grain of salt, but my understanding is that banks don't like being in the junior position to any kind of lien. With a deed of trust, then my understanding is that any loan taken out on the property after that would be in the junior position to the land being paid off.
are the banks still going to refuse lending to a borrower if the ownership document is in the form of a deed of trust or mortgage?
A bank will not lend on a property that has an outstanding loan with a lien on the property. So, if the deed of trust or mortgage is recorded, the bank won't lend money unless that outstanding loan is paid off, so they can be in first position.
can this "request written permission for material improvements" be added to a deed of trust as well?
Yes. I have it included in the templates I use.
for our specific business, isnt the dodd-frank act basically a lot about restricting seller financing for real estate property to only licensed loan mortgage originators if either of the following conditions apply:
if the loan term is more than 6 years
This I'm not sure about. I'd have to dig a little bit to see what it says.
if there are no "dwellings" constructed within the loan term
For the most part yes, but there are still some things about Dodd-Frank that apply to vacant land too. I've got a long blog post about it here where you can learn more.
Disclaimer: I'm not an attorney or a CPA, so don't take any of this as legal or financial advice. This is just my understand after spending many hours trying to decipher what Dodd-Frank actually says.