What is seller financing on land?
Seller financing on land means the owner lets the buyer pay part of the price over time, taking the buyer's signed promise to pay secured against the land by a deed of trust. Virginia's mortgage lender licensing chapter exempts a person extending credit for the purchase of real property the person owns, and the federal seller-financer exclusions cover only dwelling-secured credit, when every listed condition is met.
A promise to pay and a deed of trust, and who holds each after closing
A seller-financed land sale closes like any other in one respect: the deed passes to the buyer and is recorded. What is different is what the seller walks away with. Instead of the whole price, the seller leaves the table with two papers.
The buyer's promise to pay
Usually called the note: the buyer's written promise to pay the balance on the terms the parties set. The seller holds it.The deed of trust
The buyer, as grantor, grants the land to a trustee in trust to secure that debt, and the seller is the party it secures.Virginia's statutory form in Va. Code 55.1-316 describes that second paper in a sentence: the grantor grants the described property to the trustee in trust to secure the described debts. How that instrument works in general, apart from a seller-financed sale, is covered in what a deed of trust is.
Because the deed passes at closing, this is a different arrangement from an installment land contract, where the buyer pays over time and the deed waits until later.
Without a signed writing, neither the sale nor a credit promise of $25,000 or more can be sued on
One Virginia writing rule reaches both halves of the deal.
Va. Code 11-2 lists the promises no one can sue on without a signed writing. A contract for the sale of real estate is one, as what documents you need to sell land explains, and the same section adds "any agreement or promise to lend money or extend credit in an aggregate amount of $25,000 or more."
An unwritten agreement to sell a tract and carry a balance of $25,000 or more runs into that rule twice. The purchase contract, the note and the deed of trust are three documents, and their terms (the rate, the schedule, what happens on a missed payment, whether the buyer may prepay or resell) are drafting choices. That drafting belongs to an attorney.
Virginia's mortgage licensing chapter exempts an owner who finances its own property
A common worry is that carrying a note makes the seller a lender who needs a license. Virginia's mortgage lender and broker chapter answers part of that directly.
Persons who make loans or extend credit for any part of the purchase price of real property owned by such person.
Va. Code 6.2-1602, item 12, among the persons exempt from the chapter
The same section separately exempts lenders making three or fewer mortgage loans in any period of 12 consecutive months.
The chapter's definitions also narrow what it covers. A mortgage loan, as the chapter defines it, is a loan to an individual, primarily for personal, family or household purposes, secured by a mortgage or deed of trust on one- to four-family residential property in Virginia. It excludes loans to people related to the lender by blood or marriage and to bona fide employees, and it does not include a loan secured by property used for a commercial or agricultural purpose. Residential property, in the same section, means improved real property used or occupied, or intended to be used or occupied, for residential purposes. Whether a note on a particular tract falls inside those words is an attorney's reading.
The federal seller-financer exclusions depend on a dwelling and on every listed condition
The federal rule people have in mind is 12 CFR 1026.36, and its own heading limits it to credit secured by a dwelling. Within it, two paragraphs say when a seller who finances a sale is not a "loan originator."
| Condition | Paragraph (a)(4): three properties | Paragraph (a)(5): one property |
|---|---|---|
| Who | A person | A natural person, estate or trust |
| How many sales financed | Three or fewer properties in any 12-month period, each owned by the person and serving as security | Only one property in any 12-month period, owned by it and serving as security |
| Construction | Has not built, or acted as a contractor for building, a residence on the property in the ordinary course of business | The same condition |
| Repayment | Fully amortizing, and one the person determines in good faith the consumer has a reasonable ability to repay | A repayment schedule that does not result in negative amortization |
| Rate | Fixed, or adjustable after five or more years with reasonable annual and lifetime limits on increases | The same condition |
Two limits run through that table. First, the rule governs dwelling-secured credit, so whether it reaches a note on bare land, or on land with a house, is a threshold question. Second, meeting every condition only takes the seller out of the loan originator definition in paragraph (a)(1). It is not a general exemption from federal lending rules, and failing one condition changes the analysis. Whether a particular seller and a particular note meet each line is a question for an attorney.
The deed of trust reads as a contract, and the statute fills in what it leaves out
A seller's deed of trust is read like any other: Va. Code 55.1-320 treats it as a contract and supplies default terms where it is silent, among them the owner's promise to pay the property taxes and the trustee's power of sale on default.
Both sides of a seller-financed sale live with those defaults unless the documents change them, with the seller as the party the trust protects. The notices, the advertisement and the order of payment after a trustee's sale are set out in deeds of trust explained.
One reason a buyer may ask for terms is the loan market. Fannie Mae, for example, does not purchase or securitize mortgages on vacant land or agricultural properties; the fuller picture of bank lending on land is in whether you can buy land with a regular mortgage.
Payments that arrive after the year of sale make it an installment sale for the IRS
The IRS defines an installment sale as a sale of property where at least one payment is received after the tax year in which the sale occurs. A sale where the buyer pays the seller across later years fits that definition.
- Gain over time. Under the installment method, the seller includes in income each year only the part of the gain received, or considered received, that year.
- Interest. Interest the buyer pays is included in income as ordinary income.
- Stated interest. If the installment contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as unstated interest or original issue discount for tax purposes, even where there is a loss.
How that interacts with the gain on the land itself is covered in whether you pay capital gains when you sell land. The IRS explains the method in Publication 537, and applying it to a particular sale is a CPA's work.
Thinking about offering terms to the buyer of your land?
Tell Lowell about the tract and the terms a buyer has asked for. He can talk through the sale and the land, and the note, the deed of trust and the tax side stay with your attorney and CPA. No cost, no obligation.
Got it. Thank you.
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Questions this raises
Does a landowner need a mortgage license to carry the note on a sale in Virginia?
Virginia's mortgage lender and broker chapter exempts persons who make loans or extend credit for any part of the purchase price of real property they own (Va. Code 6.2-1602, item 12). Federal rules are separate: 12 CFR 1026.36 excludes certain seller financers of dwelling-secured credit only when every listed condition is met. Whether a given seller and note qualify is an attorney's question.
Does the buyer own the land while still paying the seller?
In the arrangement this page describes, yes. The deed passes to the buyer at closing, and the seller holds the buyer's written promise to pay the balance, secured against the land by a deed of trust. That is the line between seller financing and an installment land contract, where the deed is delivered later. How a particular sale is structured is set by its documents, and drafting them is an attorney's work.
Is the interest on a seller-financed note taxed like the gain on the land?
The IRS treats them as two items. Interest on an installment sale is included in income as ordinary income, while under the installment method the seller includes in income each year only the part of the gain received that year. If the contract lacks adequate stated interest, part of the principal may be treated as interest. A CPA applies those rules to a specific sale.
Where this page's facts come from
Every rule, office and figure above traces to one of these. Rules change; check the office before you act on one.
- Va. Code 55.1-316, statutory form of deed of trust Virginia General Assembly
- Va. Code 55.1-320, deed of trust construed as a contract, default duties Virginia General Assembly
- Va. Code 55.1-407, recording and purchasers for value without notice Virginia General Assembly
- Va. Code 11-2, contracts and credit agreements that must be in writing Virginia General Assembly
- Va. Code 6.2-1602, exemptions from mortgage lender and broker licensing Virginia General Assembly
- Va. Code 6.2-1600, definitions of mortgage loan and residential property Virginia General Assembly
- 12 CFR 1026.36, credit secured by a dwelling and seller financers Consumer Financial Protection Bureau (eCFR)
- Topic no. 705, installment sales Internal Revenue Service
- Selling Guide B2-3-01, general property eligibility Fannie Mae