September 29, 2017, BY BOB BULLINGER
If a person wants to buy a home but lacks the qualifications to qualify for a traditional mortgage, or lenders choose to not lend in the lower price band markets common in many areas of the Mid West or South, signing a Land Contract is another option for purchasing property.
A Land Contract is a written agreement between the seller of the property and a potential buyer. Instead of taking out a mortgage and making payments to a bank, the buyer makes payments to the seller. The seller retains ownership of the property until the buyer pays the entire purchase price.
Think of a Land Contract this way; have you ever financed a car through a bank? If so, you have the right to drive the car and get the registration. However, the bank only sends you the title after you have made all the payments.
Land Contracts are sometimes called a Contract For Deed.
When a land contract is convenient
People can use Land Contracts to buy or sell any type of property, including personal residences, commercial buildings and land. There are several common situations where a buyer and a seller might use a Land Contract instead of going through the conventional mortgage process:
- The buyer lacks the credit, down payment or income that traditional lenders require.
- The buyer could be self employed and does not fit into the bank’s strict qualifying guidelines even though they have the income to afford the purchase.
- The seller needs to sell a property as quickly as possible.
- The seller prefers to accept payments in return for a higher sale price.
A Land Contract provides quite a bit of flexibility when it comes to the conditions of the sale. Some of the items that the buyer and seller have to agree on include:
- The down payment.
- Length of the contract.
- The interest rate.
- The final sale price of the property.
Sellers may allow buyers to make regular payments on property over a certain period of time, or they can demand a balloon payment after a specified amount of time. For example, the contract might state that the loan is amortized over 30 years buyer has to pay off the entire balance after five years. During the five years, the buyer could take steps to improve his credit and secure approval for a traditional 30 year mortgage.
On average, it takes 65 days for a home to sell. If the seller doesn’t want to wait this long or fears that a bank may turn down a mortgage for the property, the seller can opt to sell it with a Land Contract.
Lenders may not agree to a mortgage for a property that requires extensive repairs or doesn’t meet other criteria. However, with a Land Contract the seller has the option of selling it as is instead of making the improvements or repairs.
Real estate markets constantly fluctuate; in a down market, the seller can often get more money for the property by offering a land contract. Buyers are typically willing to pay a higher overall price in exchange for the availability of seller financing.
Risks of buying or selling property with a land contract
A Land Contract has disadvantages for both the buyer and the seller.
A buyer who purchases a home with a traditional mortgage accumulates equity as he makes payments. He also gets to take advantage of gains in the housing market that raise the value of the house. Should the buyer decide to sell the property before the mortgage is paid off, the buyer still gets to realize the equity in the home.
However, if the buyer uses a land contract and decides he doesn’t want to remain in the home, he has no equity, even though he has made payments, a down payment and the home has risen in value.
It’s important to note that the courts consider the buyer an equitable titleholder to the property. This means that the buyer has an interest in the property, which prevents the seller from completing any actions that disrupt the buyer’s potential claim to the property.
A seller in a Land Contract has to assume the risk of a mortgage lender. There’s always the possibility that the buyer may not make the agreed-upon monthly payments. This is one reason that buyers usually pay more for property bought with a land contract.
The seller can file a land contract forfeiture in court that basically evicts the buyer and terminates the buyer’s interest in the property. However, the seller gets to keep all payments made by the buyer and retains ownership of the property. In some cases depending on the number of payments made and whether the buyer has obtained “equitable interest” a foreclosure process may be required by the seller to repossess the house.