The bank will forclose on you for the note on the mortgaged land.
I doubt the builder will get a contruction loan to build on such land. Or,
Until paid... there can be no clear title on any house and lawsuits will follow on you.
If you owner-financed a loan the only way I would allow for them to build is if they pay cash. They should not, under any circumstances, get a loan to pay for construction. If they did and they defaulted you would get teh land-- and the lien that would go with it.
A bank can give them a construction loan that would pay you off and give them money to construct all in one. Only allow them to do it this way!
Make a stipulation that no building can be done on it until it is paid for........avoid the possible headaches. They might be able to get it rolled into the loan for building the house. The last thing you want is a situation like you describe, them defaulting on the property and then having a home on the land. Consult a real estate lawyer, it shouldn't cost you too much........or just ask some property brokers, they should be able to give you the right answer.
Companies that sell ready-made houses insist you either own the land or get it all financed in one package. A salesman told me that's why--it's too tricky if the buyer defaults on one or both loans.
If you do finance it, put it into the contract that they won't finance anything on the land unless they pay off your loan first. See a lawyer.
How is the bank involved if you are "owner financing".
If the party you sell the land to defaults on the loan that you are carrying, the property ownership reverts back to you, anything they built would belong to you. Anything that could be hauled off, not permanently attached, they can take with them.
You can then go after them legally for the default on your note.
Hire an attorney to draw up your sales agreement on the property.
In most, if not all, states, you would own any improvements to the land if the buyer defaulted. If they built a permanent building there, that becomes yours. They would have the right to remove a mobile home or temporary/movable structure.
If they were financing the building of a house on the land, the bank would probably want to pay you off before they financed something they could lose.
You get the property back, including all the improvements constructed on it to that point. However, if the buyer is planning to get a construction loan, their lender will require that you "subordinate" your mortgage to their construction loan -- meaning the lender will come first & you will stand in the position of a 2d mortgagee.
That is a great idea to owner finance the house. Now if they build on it and default on your note you can then foreclose. Anything on the lot then becomes yours.
Most lenders once the construction has been completed will pay off the land loan so in all probabilty you will no longer have an interest in the land.
Before the construction start the lender might even ask you to subordiante to a construction loan.
You may chose not to do so, then in all probability the lender will not lend on the construction loan.
If you chose to subordinate to a construction loan you will become a 2nd mortgage subject to your loan being paid off immediately after the construction is completed. You should word a subordinate agreement this way so you will be protected and paid off when the construction is complete.
I hope this has been of some use to you, good luck.
"FIGHT ON"
your loan must be paid first before any construction loan if you did the note and mortgage correct with no sub-ordination clause. If you do not know what I am talking about you should not be financing land for buyers. a fool and his money are soon parted.
If your mortgage/ note is second place (junior lien) you must pay off the construction loan to protect your security and then you foreclose and take back the land or else get paid what is owed by whoever bids higher than you. If you do not have the money to do this, you must borrow it on the constructed improvement (if done,) or else on the land. it is complicated and you have not given enough facts. see an attorney QUICK!
It would be a bit complicated in that matter. I'd say the bank would be interested in doing the whole loan. With you holding title to the land the bank wouldn't have much of a way to repossess the whole thing. They could only repossess the home on the land and that would be difficult. If that did happen, I'd say the bank could have a lien on your land. Talk to whatever bank they will use to finance and see what they say.
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