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August 22, 2014, 12:40:48 PM

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Real Estate Investing Forums | Real Estate Investing | Sub2, Owner Finance, Options, Lease Options Forum (Moderators: $Cash$, Bluemoon06, kdhastedt, Mdhaas, motivatedceo) | Topic: Do land contracts amortize? « previous next »
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angelheart
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« on: February 03, 2010, 11:08:20 AM »

Hi, I'm trying to buy a house on a land contract.  The seller is amenable to the idea but there are things about land contracts that we don't understand. 

The main thing I need to know is whether the land contract amortizes.  Does each payment permanently decrease the amount that I owe him? 

In other words, will the sum of my payments be subtracted from the current purchase price when I get a traditional loan in a few years?  This doesn't represent our actual figures, but let's say that we lock in the price of $100,000 and I pay $500 a month for 3 years before getting a traditional mortgage.  At the end of the term, would I only owe him $82,000 or would I still owe $100,000?

I'd also like to know how the down payment figures into this.  How are down payments to sellers treated in land contract deals?  Would it lower the mortgaged amount even further, like in a traditional sale?  Also, would I need a separate down payment in 3 years when I get a traditional refinance loan?

I know that there are a lot of savvy people here...I hope someone will "clue me in" so I can know how to structure the deal.  Thanks!
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Mdhaas
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« Reply #1 on: February 03, 2010, 11:20:40 AM »

Welcome to the REI Club. 

It really depends on how willing the Owner is to work with you.  The land contract  aka Contract for Deed can reflect an interest rate and term or it can reflect just a payoff amount

Think of it as an IOU with restrictions.

Deposits and their handling is again based on what the landlord wants.  If you search the web for land contracts you will get a little better understanding of the variations.

Guidelines may vary from state to state.

http://www.uslegalforms.com/contractfordeed/
http://www.lsnm.org/landcontract.html
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If at first you don't succeed.....................skydiving is not for you
herbster
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« Reply #2 on: February 03, 2010, 02:54:33 PM »

With your degree of knowledge about the subject I could write you a whole book on it. But why, there's a free one this site called Owner Will Carry. Better yet both parties should seek the help of a lawyer. 99.9% are amortised. Herbster
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Mdhaas
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« Reply #3 on: February 03, 2010, 02:58:58 PM »

The freebie book that Herbster mentions can be found here:

http://www.reiclub.com/freebies.php
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Rob in Atlanta
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« Reply #4 on: February 04, 2010, 07:04:53 AM »

Amortizing a land contract is a function of adding a provision in your contract.  In the past, I've attached an amortization schedule at an agreed interest rate to show the amount of equity build up in each payment over the term of the contract.  The amortization schedule is actually made as part of the contract.  This can be done in your negotiations.

I would be cautious however, in that when you resell with a land contract (or contract for deed) and there is a default at hand, many of the judges in court do not like these contracts.....I would go as far as saying they have 'attitudes' towards these contracts, and I have seen favor given to the tenant/buyer.  Learned that the hard way!  I, no longer, use land contracts and have not in over 15 years.

Hope that helps.

Rob
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Rob in Atlanta
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« Reply #5 on: February 05, 2010, 12:21:23 PM »

Your down payment will come right off the top of what you owe.

Your monthly payments will go partly towards the interest and partly towards the principle (what you owe). How much goes to each place depends upon what you have negotiated and put into your contract.

Your contract should contain both the interest you are going to pay and the amortization rate.

If both you and the seller are unsure about the payments, I suggest that you use an escrow service to handle the payments. For a couple of $ each month, they will handle keeping track of the payments made and the interest. They will use whatever figure you give them for teh interest rate and the amortization rate.

Most likely, very little of your monthly payment will go towards reducing the balance. The only way that every penny you have paid will come off of what you owe, is if the seller agrees to accept an interest rate of zero.
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Dave T
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« Reply #6 on: February 06, 2010, 07:48:44 PM »

As far as the IRS is concerned, a land contract sale (contract for deed) is an installment sale.  Even if the contract calls for all of your monthly payments to be applied to the principal balance of the loan, the IRS will require the seller to allocate some of each monthly payment to interest.

Seller's find their tax returns a little easier to prepare if their long term seller financing is either interest only or an amortizing loan.
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MichaelQuarles
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« Reply #7 on: February 07, 2010, 03:40:27 PM »

Dave T

Doesnt the IRS let us write off interest even if the loan has a Zero interest rate?

I think that 's cool

Michael
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Dave T
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« Reply #8 on: February 10, 2010, 10:21:43 AM »

Not if you are the buyer, although I am not 100% confident here.  They do require the seller to impute interest and have it taxed as ordinary income.
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MichaelQuarles
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« Reply #9 on: February 10, 2010, 10:43:11 AM »

I will re check with my tax man... I think its like 1.75% interest deduction on a 0% loan... I will find out
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Dave T
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« Reply #10 on: February 19, 2010, 03:59:14 PM »

Imputed interest rate apply to the seller, not to the buyer. 

Just how I see it.  Let us know what your tax guy says.
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« Reply #11 on: February 19, 2010, 04:47:24 PM »

He thought about it for a while... Agrees that it is an issue for the seller and sees a defense for the borrower to claim an interest.  After a quick search on Google there are several articles saying that on a secured mortgage that a borrower can... However there were articles that used the word "Might" as well...


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« Reply #12 on: March 06, 2010, 05:35:06 AM »

Hello!!

I want to suggest you that please check all the legal formalities needed before buying any house and then go through the all the information regarding the previous owner and his property.

Then after all this investigation go with further proceedings.

Thanks

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« Last Edit: March 06, 2010, 06:01:20 AM by Mdhaas » Report to moderator   Logged

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Real Estate Investing Forums | Real Estate Investing | Sub2, Owner Finance, Options, Lease Options Forum (Moderators: $Cash$, Bluemoon06, kdhastedt, Mdhaas, motivatedceo) | Topic: Do land contracts amortize? « previous next »
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