In last week’s newsletter I talked about how I recently used mobile notaries to get some land contracts cancelled. I received a few questions about what it means to cancel a land contract, and why you would want to do it. So this week I am going to elaborate on that.
First of all, what is a land contract and what does it mean to cancel one? I’m not going to deep dive on land contracts here, but I like to think of them as similar to auto loans. When you buy a car with a loan you drive off with the car, but the bank holds the title until you pay off the loan. With a land contract the borrower has possession of the home and is responsible for maintenance and repairs, but you as the lender are on the title. When both parties agree to cancel the land contract it means the borrower is leaving the property and the lender takes possession back.
The next question I received was how do you get into a discussion with the borrower about cancelling the land contract? This can come up during the loss mitigation phase soon after buying a non-performing note. It wouldn’t typically come up on a performing note unless there was a very unusual situation. The borrower may want to cancel the contract if they have already moved out the property is vacant and they just want to be free of the debt. Or they may be planning to move. I think of it as a deed in lieu or a cash for keys, except in this case I’m not actually handing over any cash. Cash for keys may come into play if the borrower is still in the home, and needs funds (and maybe some motivation) to move on.
This ends up being a win-win for both parties. For the borrower it eliminates their debt in a situation where they are already planning to move on. For the lender it can save a significant amount of money in legal fees, and also take months off of the deal timeline. Of course at this point as the lender you now have an REO, which brings with it its own set of headaches. But that’s a subject for future newsletters…..