Hey hey, JP Moses with you for this here Awesomely blog post.
So, I often share info about creative dealmaking and emphasize its importance for investors who would like to begin to tap into profit gaps in the market and the deals that they’re already doing by exercising some creative dealmaking strategies from time to time.
I was thinking about one such deal in which I made a creative offer — an arrangement with the seller to buy the property subject to. “Sub to” deals are an important piece of the puzzle and definitely have their place for specific kinds of deals.
But!
There’s another key player in the creative dealmaking game that’s also worth understanding and contrasting to subject to.
What is it?
Contract for deed or the land contract.
It’s very similar, but also different from subject to in some key ways.
Before we even go there, I think we need to really start with a solid understanding of what traditional owner financing even looks like…
So, with owner financing, the owner of the property is taking the place of the bank. Most people will go to a bank or a traditional lender to borrow money to buy a house. But with traditional owner financing, the owner finances the property instead of the buyer borrowing that money from a bank. The buyer then directly pays the owner a down payment and monthly payments as per an agreement.
The deed transfers at closing with traditional owner financing, just like a regular sale. So, the buyer in a traditional owner financing arrangement has full ownership of the property on a deed as soon as they begin making those payments.
This structure is commonly used by:
- buyers who want greater flexibility with the deals, with their financing and the terms
- sellers who find it interesting to get cash flow rather than a lump sum and/or possibly a faster, easier sale depending upon market conditions
Let’s chat about all the good…
The pros for traditional owner financing for the seller is that the seller can create a note. That automatically balloons the payoff sooner than 30 years. In other words, you can create a loan that amortizes for the full 30 years but is required to be paid off in 10 years for whatever is due at the time.
And, traditional owner financing can often be ideal for retired people needing cash flow rather than a lump sum. It’s also possibly great for free-and-clear properties for people who wish to not pay capital gains tax due to receiving a large lump sum.
The pros of traditional owner financing for the buyer include flexible acquisition.
For example, you can often buy with traditional owner financing for $0 down and/or arrange little-to-no interest payments. It’s easy to qualify because it’s basically how much rapport you’ve been able to create and maintain with the seller rather than a bank. And the buyer gets, as I said, full ownership of the property via deed transfer as soon as the first payment is due.
It gets better…
Defaulting on traditional owner finance does not impact your credit because most owners don’t even know how to report it to a credit agency.
All right, now that we understand traditional owner financing a little bit better, with our snapshot on the topic…
Let’s talk about the contract for deed.
The contract for deed, also known in many circles as a land contract, is very similar to traditional owner financing in that the owner takes the place of a lending bank — the buyer pays the owner directly both a down payment and monthly payments.
But!
The deed does not actually transfer in a land contract until it’s 100% paid for. Hence, the name is a contract for the deed.
Did you know you can flip land? Check out or land flipping guide.
There are a few states that have begun to question its validity, but it is still valid in the majority of U.S. states and is even the primary kind of seller financing in some states.
Its common uses and pros and cons are very similar to traditional owner financing. With the exception that the seller is in greater control in a contract for deed versus traditional owner financing, because the deed doesn’t transfer — so if the buyer defaults, the seller doesn’t have to actually foreclose in most states.
Many times, you can simply evict buyers who have defaulted on their contract for deed. However, in some states, the seller might still have to foreclose, especially if the contract for deed ends up being recorded.
Check with your state about its particular requirements, if this is a strategy that’s interesting to you.
And of course, it makes sense that the buyer of a contract for deed is in less control because there is no transfer of the deed until it’s paid in full.
When structuring deals, clearly you want the most control possible as a real estate investor — traditional owner financing is somewhat superior to a contract for deed when you’re in a buying position, and conversely, the contract for deed beats traditional owner financing when you’re selling.
So…
Maybe now’s a good time for you to consider adding owner financing and land contracts to your real estate investing wheelhouse.