Land Deed on Seller Financing Bad Idea? (recommendation, foreclosure, negotiations)

[ShakyJ]

Buying a home with seller financing. All terms are good and worth it for us. Seller financing is really our only option right now due to just coming out of a bad debt situation.

Good price, rate, terms. The only thing we are sticking on is the title. We would like the title to be in our name, the seller wants it to be based on a land deed while he plays bank for up to 5 years, the refi point.

I suggested that to meet in the middle. Start as a land deed and then after 1 year of good history and payments we make the title ours.

I know if it is a land deed we dont get the homestead tax deduction and the home insurance is cannot be in our name, we would need insurance for our property.

If we write up the contract that it needs to be transferred to us after a year, what can the seller do worst case scenario if he still holds the title as a land deed for a year?

Thanks!

[399083453]

Good terms? How do you know? Has a real estate lawyer looked at it? It already sounds bad to me. This will probably be the largest investment in your life, how about spending $400 for a lawyer to look it over?

[jackmichigan]

Laws and practices vary from state to state, so you really need someone knowledgable about your particular state's laws. It is always a good recommendation to consult with a qualified local real estate attorney.

With that caveat, in Michigan, the situation you describe is usually called a Land Contract. Payments are made on the contract, and the deed is not given to the purchaser until the terms of the contract are fulfilled. It is generally a bit more favorable to the Seller because it is easier to foreclose on a delinquint Land Contract as opposed to foreclosing on a mortgage. Again, in Michigan, purchase on a Land Contract IS considered a transfer of ownership so that homestead exemptions ARE available to the new owner, and homeowner's insurance is available as well.

When a Seller transfers title, but takes back a mortgage on the property, that is often referred to as a Purchase Money Mortgage. State laws dictate the foreclosure process, which tend to be more restrictive and time consuming to the Seller. I have been on both ends of a Land Contract--both as a buyer and as a seller--and there are clearly pros and cons to each party.

Whichever route you may choose, before you complete a purchase make sure that the chain of title is thoroughly investigated. I would recommend--and your attorney will probably recommend, too--that you get a title insurance policy. That will also identify all outstanding liens and encumbrances against the property.

Again, you need local advice, but one alternative to consider might be to have the Deed fully executed upon the sale, but held by an escrow agent until the terms of the contract are satisfied. A local attorney would know best.

You also mentioned a "refi point" at five years, so I'm assuming that a balloon payment is due on whatever is still owed after five years. What if, for some reason, financing is not available? Do you have a back-up plan? I certainly haven't read your contract, but there may be more to consider than you're thinking about at this point.

Finally, you asked for a worst case scenario, so here's one that has happened: an unscrupulous property owner sells on a Land Contract and then places a large mortgage on the property which goes into foreclosure. Or how about a worst-case scenario for a Seller: purchaser fails to pay property taxes; or purchaser fails to maintain insurance and the house burns down. It can't get much worse than that.

Good luck with your negotiations (preferably, with the assistance of an attorney).