In Commercial Lending is a Land Contract a Purchase or a Refinance?

In middle America, land contracts or contracts of sale are quite common in the sale of small commercial properties.  They are also quite common in the sale of homes and land.  A land contract is first created when a seller wants to finance the sale of his/her property.

As an example, consider a retiring insurance salesman wanting to sell his small office building to a young salesman who is taking over his practice.  Say the sales price of his office building is $150,000.  Because the prospective buyer is young he/she might only be able to put down $10,000.  This is far too little for a bank loan or and also too small for a commercial lending organization to handle.  The ”old guy” might have much faith in the younger man, however, he might just carry back a $140,000 loan on the building.  The young “whippersnapper” will make payments for five years and then refinance the balloon payment with a commercial lender in due time.

So, in commercial lending, if the terms are identical, how is a land contract or a contract for sale?  Until the young man in the example above pays off the contract of sale on the building, the title to the property stays vested in the name of the “old guy” and during the term of the land contract, the “old guy” is known as the legal owner and the young “whippersnapper” is known as the equitable owner.

In commercial lending the equitable owner of the property will enjoy virtually all of the rights of ownership; i.e., the right to exclude others (get the *&^%)#$% off my property!!), the right to use the property himself, the right to the quiet enjoyment of the property, and the right to collect rent.

In commercial lending these rights are know as the ”bundle of rights” and you should look at  them like arrows in a quiver. The only thing the “young whippersnapper” (equitable owner) does not have is the right to have his name listed as the legal owner of the commercial property.

There really is not much difference at all between a land contract and a normal mortgage carried back by the seller.  In commercial lending a number of years ago the legal owner of a property sold under the terms of a contract of sale could foreclose out the equitable owner faster than by using a regular mortgage to foreclose.  Instead of it taking seven months to foreclose in a mortgage the legal owner could foreclose in, say three months.  As years have gone by, many state legislatures and courts have extended the cure period for equitable owners to rival that for mortgagors in such commercial lending contracts.   Today, in commercial lending, the main difference in a land contract and a mortgage in only one of form.

In commercial lending contracts today land contracts can often be assumed.  This is especially true if the interest rate is higher than what the original seller can earn on his money if he gets paid off.  Just suppose than in a commercial lending land contract is 10% banks are only paying 4% on deposits.  In such a case the former seller will more often than not allow his land to be assumed.  Also, junior financing behind land contracts is also a possibility.  In commercial lending, as a practical matter, there really is very little difference between a land contract and a mortgage.

Remember, commercial lending deals are all different and unique.