Land Contract vs Deed of Trust: Which is Better for Seller Financing?

Land Contract vs Deed of Trust: Which is Better for Seller Financing?

– Hey guys, this is Seth, and I’m coming to you today because for several months now,
I’ve been working on a huge ambitious project that ultimately turned out to be way more than I could ever deliver. The issue boils down to seller
financing and specifically, what loan documentation
you’re supposed to use for seller financing in all 50 states. And the reason this is
kind of a complicated issue is because every single state in the U.S. has a slightly different set of rules and laws and statutes and regulations that govern seller finance. In some states, it makes a lot more sense to use a land contract, which is also known as
a contract for deed. In other states, it makes
a lot more sense to use a promissory note and a deed of trust, which is just a totally different type of financing loan instrument. In some states, you can actually
use both of these options, and then in some others out there, you can’t really use either. So it just makes it a
really confusing subject to try to wrap your mind around. And it’s usually not too
hard to figure out the basics in one single state, but if you’re trying to figure this out in a number of different states, it can get really confusing really fast because every single state
just has a lot of things you have to know in order to fully grasp what’s going on in a seller financed deal and to just understand the consequences of what you’ll have to deal with if you ever get a borrower who defaults on their payments to you and you have to go about trying to foreclose on that property. Some states will make
it really, really easy for you to foreclose on a property if the borrower ever stops paying if you use the right loan documentation with the right language. And other states will make
it very, very difficult to go through that process regardless of whether you use the
right loan documentation. It’s just a very cumbersome
process to go through. Given how wildly different
all the rules are in all 50 states, I had this super-ambitious goal of putting together this comprehensive, interactive map of the U.S., and what I wanted to do was have the user be able
to hover over any state and then they would be able to see exactly what type of loan
document they’re supposed to use, and then how the foreclosure process typically works in that state if they’re following all
the proper procedures. And since I’m not an attorney and I can’t really give legal advice, I wanted to also include
links on each state where people could click on the state and it would take them to an
actual attorney’s website, the attorney that I talked
to to get the information so that they could then
find out more information if they wanted to pursue
seller financing in that state. So that was my original dream and after spending just a
ridiculous amount of time on this project, I finally came to the painful conclusion that this was way, way, way more than I could deliver. And there’s a few reasons why. When I first started this process, I thought it would be easier to just call title
companies in every state and just ask them, “Hey, when you’re doing
seller finance deals, “do you typically use a land contract “or a deed of trust or a
mortgage or something else?” What I found was that a lot of times they could tell me what they normally saw, but that wasn’t really enough information. They couldn’t tell me anything about how the foreclosure process worked, they couldn’t tell me
any legal considerations or any real important
issues to be aware of in a seller financed deal. It was just a very uneducated answer, which honestly, that’s
all you can really expect if you’re not talking to a real attorney. So I figured out pretty quickly that just getting these answers
from title companies was not gonna be sufficient. So when I finally started
calling attorneys, I found out pretty
quickly that a lot of them wouldn’t even talk to me without charging me hundreds of dollars just to like give me their quick feedback. And then of the ones
that would talk to me, a lot of them would not let
me link back to their website. They didn’t wanna be liable for anything. Which I guess I could understand, because I honestly
can’t make any statement on their behalf on this map. So we really just kind
of gummed up the process and made it way harder than I
ever thought it was gonna be. And what made it even harder beyond that was there were several cases where I actually talked to more than
one attorney in each state, and I started getting
attorneys who would like, give me conflicting information. Like one attorney would say, “Oh yeah, in this state “you’re supposed to use a land contract.” Then another attorney would say, “In this state, you’re supposed
to use a deed of trust.” And some other states would
be a similar issue to that, and I was just like “Man, if I can’t even
get consistent answers “from attorneys, how can I be expected “to give reliable information to people “when first of all, I’m
not even an attorney, “and then the people who are attorneys “can’t even agree with each other?” It just got like, really,
really frustrating, and basically impossible
to put together this comprehensive, one size fits all answer for everybody’s
problems kind of map that I wanted to do. So with all that said, even though, unfortunately
I can’t spoon-feed you the correct answer in every single state, I don’t wanna leave you hanging. I wanna help you understand
what the right answer is in the state where your
properties are located if you wanna get into seller financing and use the right instrument with the right language, and just understand everything throughout this whole process. So just looking at my situation, whenever I wanna get into
seller financing in a new state, usually the first thing I’ll do is I’ll get on a site like Google, or even a more specialized
site like Rocket Lawyer that has connections to
tons of different attorneys all over the state, and I’ll just start searching for an experienced real estate attorney in the state where my property is located. I might Google something like, you know, Minnesota real estate attorney if I’ve got a property in Minnesota that I’m trying to sell
with seller financing. And I will say that not
every real estate attorney is built the same. Some of them are very experienced and they know exactly how to answer your specific question because they do seller
financing all the time, but not every attorney
does seller financing. So I would say when you
find a real estate attorney and you give ’em a call, start by just asking them, “Hey, how much experience do you have “doing seller financed real
estate deals in this state?” Any good real estate
attorney worth their salt should be able to give you
some pretty good confidence in their abilities, and if they can’t do it, they should be upfront and
just tell you about that. Once you’re feeling reasonably comfortable with their level of experience in handling your specific issue, you could then go on and
ask a question like this: “If I’m selling a property in this state,” you know, whatever that state name is, “with seller financing, “what type of loan instrument “would you recommend I use: “land contract, deed of
trust, something else?” And you could even specify the kind of property you’re selling. So in my case, I would say “If I’m selling a parcel of
vacant land in this state,” and then go on with the
rest of my question, just so they understand specifically what type of property I’m selling. Once they’ve indicated what kind of loan document they would recommend, you then go on to ask them, “If I use your recommended documentation “and the buyer ever stops paying, “is it possible for me to do a “non-judicial foreclosure in this state “to repossess my property?” And also, “Will I need to
include any specific language “in order to take
advantage of this option?” Now this is a really important question because a nonjudicial
foreclosure in most states means it will a lot easier, a lot faster, and lot less expensive
to get your property back if the borrower ever stops paying. Some states will allow a
nonjudicial foreclosure but only if you’re using
the right loan document, and if the right language
is included in that. Whereas other states don’t allow nonjudicial foreclosures period. It doesn’t matter what
you use or what it says, if you ever wanna repossess your property you have to go to court, which is a lot more expensive, and can be a lot more time
consuming in some cases. So that’s why it’s
important just to understand if you go down the seller financing path regardless of what documents you use, what is it gonna mean if the
borrower ever stops paying you? How much of a hassle is this gonna be, and does that extra
hassle and time and cost create problems for you? Because for a lot of deals, especially if they’re cheap properties and you’re not making
a ton of money on ’em in the first place, if you have to go through
all these gyrations just because the borrower
stops paying you, I mean, it could really
just make seller financing not even worth it, because it’s just gonna create way more headache than it’s worth. But with other deals, if they’re super profitable already and if seller financing
makes it way more profitable on top of the profit
you’re already making, then it’s really not a huge problem to go through this kind
of foreclosure process even if it does cost you
a couple thousand dollars because you’re making so
much money on top of that, it’s just worth the risk. And this is gonna vary for
every type of property, and it all just depends on
what that state requires, what’s gonna be involved, and how that adds up with the type of property you’re selling, and how much money you’re making out of it over the long run. If the attorney says, “Yes, you can do a nonjudicial
foreclosure in this state,” the next question that
I would be asking is “Assuming I understand
the proper procedure, “is the kind of thing
I can handle by myself, “or do I have to work with an attorney “or a trustee in the
case of a deed of trust “to complete this process?” And then I would also ask, “If I’m required to work with an attorney “or a trustee to complete the process, “how much is it typically gonna cost, “and how much time does it take “to complete the foreclosure?” Now, on the same coin, if the attorney tells me “No, you cannot do a
nonjudicial foreclosure, “all foreclosures have to be handled “through the court system in this state,” in that case I’m gonna be asking, “How much does it typically cost “and how much time does it take “to get through that foreclosure process “and get my property back in this state?” Again, remember, some
states do not make it easy to get your property back. You have to go through court, you gotta file a lawsuit. And it can be worth the extra headache and hassle and time and money if the property’s big enough, if you’re making enough
money from the deal, if you’ve assessed the risk of working with this particular borrower, say we did a credit check and you understand their background and you trust this borrower
to make these payments. But if you’ve got a smaller deal where the numbers just don’t add up or the risk is just too high or just doesn’t make sense for you to extend yourself like this, then you may just wanna walk away from the seller financing
option altogether on certain properties. In the end, seller financing can be an amazing opportunity especially for a land investor who can buy properties at next to nothing and then sell ’em at a significant markup. It’s just a very, very effective way to create passive income, to build up your cash flow, just to kind of add stability to the income of your business. I mean, it does awesome things if you’re willing to
understand how things work, and just mitigate your risk in the state where you’re working. And there are definitely cases when I don’t think seller
financing is worth the trouble, but a lot of cases where it definitely is. And by asking these questions in whatever state your
properties are located in, you can do a pretty good
job of zeroing in on what it’s gonna take to do a seller financed deal in your state, and what the consequences
may or may not be if you ever get a borrower who defaults on their loan payments to you. So hopefully that all makes sense. I hope you found that helpful, and I hope this doesn’t overwhelm you. I know there’s a lot of stuff and just legalities to be aware of and it is legit, and it is important to understand, but it’s also something that I don’t think you should let
keep you back from doing this, because once you understand it and once you actually put it into action, it’s an extremely powerful tool that can do a lot, a lot for the long-term
prospects of your business. So thanks for watching, and I wish you all the best.

7 thoughts on “Land Contract vs Deed of Trust: Which is Better for Seller Financing?

  1. Clear, easy to follow, and interesting! Great job!

  2. Great video.

  3. Nice, Seth. Very helpful video.

  4. thanks your video told me a lot.

  5. Well Where’s that map of states ?????

  6. So that map is also not accessible to members?

  7. You explain things well; your video notes are helpful as well. Thanks!

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