Tuesday, July 12, 2011

Land Banking with a California Land Contract

Land Banking is a term used by land investors. It essentially means to buy land and hold it for a period of time for a long term gain. It is the same as holding a stock or security for a long period of time. Simply buy land, hold and wait to see what future growth patterns do to its market value.
A land contract is a simple contract between a buyer and seller to purchase real property. It doesn’t even have to be land. It can also be known as an installment sale agreement. It is an agreement between a seller and buyer whereby the seller provides financing to sell the property for an agreed purchase price and the buyer repays the loan in monthly installments. It is much like a typical mortgage agreement, but there isn’t a financial institution involved and there are only two parties in this transaction. Under a land contract, the seller retains the legal title to the property, yet allowing the buyer to take possession of it other than legal ownership. As an example, if a buyer pays $9,000 for a parcel with 10% down payment of $900 and then finances $8200 at 7% interest approximately $228.02 in installment payments a month over 3 years. The seller is providing a short term loan to the buyer. The seller holds legal title to the land until the loan is paid in full. After the full purchase price has been paid including interest, the seller will convey title to the property to the buyer, and record the deed with the recorder's office. If the buyer defaults on their installment payments then typically the land contract would consider this a failure to pay, and the buyer would be in breach of contract. In a failure to pay any equity earned by the buyer would return to the seller. The seller would retain all of the buyer’s payments and interest.
Land contracts are different than the typical real estate contracts, because in a land contract the seller is providing a loan to the buyer (short term seller financing). In a standard real estate contract, if there is a loan then the loan is handled by the third party lender who administers the payments after escrow closes. If a third party lender is involved then a lien (mortgage) or trust deed would be recorded on the property.
This is an easy way for a buyer to limit their risk in buying land if they don’t have the full cash amount in order to buy a property. It is also more cost effective and offers security to the seller as they will not have to foreclose on the property. We are offering land contracts on our smaller parcels, so it allows land buyers to invest in real estate with less capital and risk for tomorrow’s reward. We also think banking on your future with real estate still remains one of the best means to secure your retirement, or long term needs. With today’s low bank interest rates investing in land is a far better alternative.


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