Using an Installment Land Contract in Colorado to do a Wrap vs. an AITD

A land contract is a financing tool whereby the seller and buyer agree upon the sale of a property under installment payments. The property remains titled in the seller’s name until the buyer completes all payments under the contract. This arrangement is also known as a “contract for deed” or “installment land contract”.

The land contract can be effective tools for acquiring a property with owner financing to preserve the existing financing. If a seller of a property has a low, fixed-interest rate loan, a transfer of the ownership subject to the existing loan can allow the buyer to take advantage of this favorable financing without having to get new financing or qualify for the existing loan. If there is an existing loan on the property, it is referred to as a “wrap” or wraparound transaction.

The only pitfall with this kind of transaction is that the underlying loan can be called due by the lender under the “due on sale” provision of the mortgage. While not a likely scenario if the loan is being paid on time, investors want to make this transaction as “stealth” as possible so as not to raise any red flags. Using the land contract can be very effective ways to quietly transfer ownership and preserve the low-interest rate loan. Thus, the land contract is an extremely effective tool for the investor to learn about and implement to increase their profitability in today’s market.

Colorado, like many states, does not have a particular statute on the process for getting the property back that was sold on a wraparound land contract. Thus, theoretically, the seller might have to foreclose, depending on how much equity the buyer has in the deal. In most cases, the seller evicts the buyer as a holdover tenant (who doesn’t show up in court) and the process of foreclosure is avoided.

If you are a buyer, seller, or broker involved in a wrap deal in Colorado, contact us to draft the appropriate forms for your contract and closing.

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