Notes, Land Contracts or Contract for deed.

Note

As this is a niche market, people get more confused when I talk about Land contracts, let me clear this out for you.

Let me clear the legal stuff out of the way, this is not legal counsel, I am not an attorney, if you need legal advice, please feed an attorney, they deserve it. Now that we took care of that, let’s get into getting things clear.

A note is basically an I owe you, that is secured a mortgage or deed of trust. The note establishes who is the lender, who is the borrower, what is owed and the terms (rate, for how long, fixed, adjustable rate, balloon payment, maturity date, and other information about the loan).

A mortgage or deed of trust in a legal instrument that slaps a lien into a property to secure a loan. Which loan? the loan that was established by the note that is secured by the mortgage or deed of trust. This security mechanism ensures that if the borrower tries to sell the property the lender or note holder will get paid, it also allows for the noteholder to foreclose on the property to collect the debt.

When a borrower takes a mortgage and signs a note, they hold the title, but the debt is attached to that title.

During a home purchase, you have a seller, a buyer, and the financial institution. The seller gets paid from the seller and the financial institution. The buyer signs a note and a mortgage or deed of trust to the financial institution. He gets title to the property with a lien on it.

Land contract or contract for deed

Land contract or contract for deed is two names for the same instrument.

A land contract is the same concept as a note and deed of trust, the main difference is that the seller of the house is the one financing the purchase, not a third party, most time the financial institution is the seller.

Instead of the buyer getting title to the property and having a lien on the title, the seller (also lender in this scenario) keeps the title on their name and only hands out a land contract or contract for deed to the borrower. When the borrower makes all of the payments established in the land contract or contract for deed, then they get to have title free and clear.

As a note investor buying a non-performing land contract has some advantages, such as having shorter and cheaper legal procedures to execute the property or to regain ownership of the property.

Cons are that the property is of lower value therefore, borrowers have a hard timing re-financing, houses usually have no equity, houses are not in the best of shapes.

Some states treat land contract the same as a note-mortgage. Some states treat them as a note-mortgage once some conditions are met.