Owner financing when you sell land
Owner financing a land sale means you act as the lender. The buyer pays part of the price at closing and pays you the rest over time, with interest. It can widen your pool of buyers and spread out the tax. You also take on the risk that the buyer stops paying.
Request an offerHow does owner financing work on land?
Owner financing on land usually takes one of two forms: a note secured by a mortgage or deed of trust, or a contract for deed.
With a note and mortgage, the buyer gets title at closing and you hold a lien on the land. With a contract for deed, you keep title until the buyer pays enough under the contract. The names and rules for these documents differ by state, so an attorney in your state should draft them.
What are the risks for the seller?
The biggest risk in owner financing is default. If the buyer stops paying, you may have to foreclose or cancel the contract to get the land back. That takes time and money, and the process depends on your state.
Unpaid property taxes are the second risk. With a note and mortgage, the buyer owns the land and owes the taxes from closing. In many states a property tax lien ranks ahead of earlier mortgages. Texas Tax Code section 32.05 is one example: a tax lien takes priority even over liens that existed first.
If the buyer lets the taxes go and the county sells the land for taxes, your security can be wiped out. Require proof each year that the taxes are paid, or collect a monthly tax escrow with each payment. With a contract for deed, you still hold title, so an unpaid tax bill is a direct problem for you.
Do states regulate contracts for deed?
Some states regulate contracts for deed closely, so check your state's law before you use one. In Texas, for example, the executory contract rules in Property Code Subchapter D apply when the buyer will use the property as a residence. Section 5.062 presumes a lot of one acre or less is residential.
That means a contract for deed on a small Texas lot can fall under those rules. Ask a real estate attorney in your state before you offer one.
Do federal seller-financing rules apply to vacant land?
Federal loan originator rules in Regulation Z, 12 CFR 1026.36, cover consumer credit secured by a dwelling. A note secured only by vacant land generally falls outside them. They matter when a home or mobile home sits on the land.
When a dwelling secures the loan, two exclusions can keep a seller from counting as a loan originator. Both bar sellers who built a home on the property in the ordinary course of business. Both require a fixed rate, or an adjustable rate that adjusts only after five or more years.
- One property in 12 months, for a natural person, estate or trust: the payment schedule must not cause negative amortization.
- Up to three properties in 12 months: the loan must fully amortize. The seller must also decide in good faith that the buyer can reasonably repay.
- These exclusions cover the loan originator rules only. State law and other federal rules can still apply.
Which terms should you settle before you offer financing?
Each term in an owner-financed sale shifts risk to you or to the buyer, so settle all of them in writing with an attorney.
- The down payment.
- The interest rate and the length of the loan.
- Late fees and the default process.
- Proof each year that property taxes are paid, or a monthly tax escrow.
- Whether the buyer can pay it off early.
- Whether the buyer can sell or build before the loan is paid.
How is an owner-financed land sale taxed?
An owner-financed sale is usually an installment sale, which lets you report the gain as you receive payments. IRS Topic 705 defines an installment sale as one where you receive at least one payment after the year of sale. You report it on Form 6252 unless you elect out.
Interest you charge is ordinary income. If the contract states too little interest, the IRS can treat part of the principal as interest. Our guide on capital gains on a land sale covers the gain itself.
When is a cash sale simpler than owner financing?
A cash sale is simpler when you want one payment, no credit risk and no loan to manage. It also helps when you need the money soon, or when back taxes or liens must be cleared. Compare both with our net proceeds calculator and our guide on cash sale vs listing.
Liberty Acres is a family-owned land company. We buy land anywhere in the US, in any condition, and close through a title company. We pay back taxes and all closing costs, with no agents and no commissions. We can close in as little as 14 days. Most sales close within a few weeks to a few months, once the title work is done.
Common questions
Is owner financing a good idea for the seller?
It can be. It can attract more buyers and spread out the tax. It also adds default risk, a long wait for your money and possible foreclosure costs.
Who pays the property taxes on owner-financed land?
With a note and mortgage, the buyer owns the land and owes the taxes from closing. Unpaid taxes can still wipe out your lien, so require yearly proof of payment or a tax escrow.
Do I owe tax all at once on an installment sale?
Usually not. IRS Topic 705 says you generally report the gain as you receive payments, using Form 6252, unless you elect out.
Do federal seller financing rules apply to vacant land?
The loan originator rules in 12 CFR 1026.36 cover credit secured by a dwelling. A note secured only by vacant land generally falls outside them. State rules can still apply.
Does Liberty Acres buy land with owner financing?
No. Liberty Acres is a cash land buyer, so you are paid at closing, not over time. For larger parcels with development potential, closing can come later to allow zoning work, and you keep title until then.