Land Contract: An Overview
A comprehensive overview of a land contract - what they are and key considerations such as liabilities, interests, and rights. Learn more and get the essential information you need.
What is a land contract?
A land contract is an agreement between a buyer and seller of real estate in which the seller provides financing to the buyer. It is also known as an installment sale agreement, land installment contract, or contract for deed. Under this contract, the buyer takes possession of the property and is legally responsible for all aspects of its management (taxes, insurance, repairs, etc.), while the seller retains legal title until the terms of the agreement are satisfied.
How does a land contract work?
The buyer makes payments directly to the seller. The payments include an agreed-upon purchase price which is typically higher than the market rate, and typically includes an additional agreed upon interest rate. As the agreement is paid off, the buyer receives a deed of the property from the seller. This deed will transfer the title to the buyer and clear the debt with the seller.
Benefits of a land contract:
One of the primary benefits of a land contract is that it provides an easier option for those who cannot qualify for traditional financing. Since the seller finances the purchase, deemed credit-worthy buyers with bad credit may still be able to purchase a home. Land contracts also often require a smaller down payment than typical mortgages.
Drawbacks of a land contract:
One of the major drawbacks of a land contract is that the buyer typically has no recourse if the seller does not deliver on the contract. Since the buyer does not hold title to the property until the contract is satisfied, the seller could default on the payments or stop paying taxes and insurance on the property. Additionally, the buyer typically cannot refinance or obtain other financing on the property until the land contract is satisfied.
Conclusion:
Land contracts can be beneficial to both parties in a real estate transaction when the involved parties can trust each other. There are potential risks that must be considered before entering an agreement, but for the credit challenged buyer it can provide an opportunity for homeownership. It is important to consult a licensed real estate professional for additional information on land contracts and the pros and cons of entering into an agreement.