What Is a Land Contract and How to Buy Real Estate with No or Low Money Down
A land contract is a brilliant way to buy a home or any other property without a mortgage.
A land contract provides little protection to the potential buyer as compared to a mortgage.
As in the case of a land contract, a bank or other financial institution doesn’t get involved and only the private sellers do.
The land contract gives you an idea about the terms and conditions of a buyer and seller and what would happen if anyone breaches the decided contract.
What is a land contract?
A land contract, or better known as the land installment contract, is a written legal agreement used to purchase real estate like vacant land, an apartment building, a house, commercial land or building, or any other legal property.
It is an executory financing document between a buyer and seller.
It is similar to a mortgage, but instead of borrowing a sum directly from a lender or a bank for buying the real estate property.
Then buyer makes settlements directly to a real estate owner/seller until the purchase price is fully paid.
Depending upon the terminology for real estate in your area, you can call it a land contract, contract for deed, real estate contract, bonds for title, or an installment land contract.
What does a land contract mean?
A land contract is an alternative to mortgage financing and is used when a buyer is not willing to get a mortgage from a bank or other institution.
There can also be other reasons for not getting a mortgage facility like a low credit score or unqualified for a mortgage.
Due to those reasons, land contracts have been widely accepted by people. It is just like a seller financing in which the buyer and seller both sign the documents in which terms and conditions of the sale were written.
After payment of purchase for the stipulated time period, the legal title will get transferred to the buyer from the seller via warranty deed.
How does a land contract work?
The basic foundation of a land contract is similar to car financing. You go to the showroom for your favorite car dealership, and you want a car but with an installment from your bank or lender for the decided time period.
Now, you have your own car with the obligation to pay back money each month, or your loan will default or you will lose your car.
Now think of a car payment as a land contract in which you are clearing payments for the commercial property instead of a car.
In a typical land purchase, the seller agrees to finance the desired property to the buyer in exchange for terms and conditions levied upon the land contract.
In this traditional land contract, the seller has the legal right to keep the title until the land contract is paid in full.
At the same time, the buyer gets the equitable title to build up equity under the same property.
You can also pay-off the land contract by converting the land contract into a general mortgage.
The land contract is paid in duly installments, which is due at the periodic intervals as per the agreement between buyer and seller.
To effectively satisfy the loan, a lump sum amount can be paid, whether there remains a balloon payment or not.
Who holds the land contract title?
The seller holds the right over the assets until the completion of full payment, during which the title is then transferred to the buyer.
The agreement includes land or assets located on the specified land.
Here assets can be residential houses, courts, horse tracks, pools, etc.
Benefits of a land contract for buyers
If the buyer cannot get approval for a land mortgage due to his/her credit history or other reasons, the buyer can deal directly with the seller through a land contract.
Benefits of a land contract for sellers
The seller can negotiate with the buyer for a higher purchasing price by offering the sale under a land contract. The seller can also receive a huge cash down payment.
What are the land contract pros and cons?
Now knowing the basics of a land contract, it’s time for you to decide whether it will be beneficial for you to enter into a land contract.
Along with the benefits, there are certain disadvantages also, and it is vital to know all pros and cons associated with the land contract and the risks involved in it.
Pros of a land contract
From the perspective of both seller and buyer, these are the benefits that you can receive in a land contract:
Land contracts are a profitable option for buyers who are looking for a good property since the seller is financing the purchase instead of a mortgage lender.
Wining situation for sellers
Throughout the contract, a seller can receive a handsome income for selling and financing the property.
If the buyer is not able to make the payments, then the seller can take back the property under the legal terms and conditions of a land contract.
Better purchasing opportunities
With seller financing, there are better purchasing opportunities for buyers in terms of an alternative form of credit.
Cons of a land contract
Buyer depends on the seller
In a land contract, buyers depend on the seller making the payments if the seller has a mortgage on the property.
If the property is still under a payment period from the seller’s side, then the buyer is at risk of losing his house with no fault of his own if a seller is not able to make payments.
You have to go by each and every term of a land contract to be fully assured about terms and conditions.
Huge interest rates
The rate could be higher than the current market rate. This happens because the seller knows that you are looking for a land contract because you probably were not approved for a mortgage loan.
Now, the seller is at greater risk, so the seller can charge you a higher interest rate.
How do you write a land contract agreement?
A contract for a deed is an alternate option to the real estate purchase and sale agreement. It is helpful without securing a house purchasing loan from other parties.
The buyer can pay the seller directly in installments with the condition of the title being transferred to the seller only after making the full payment.
Different countries have different legislations to cover land contracts.
There are certain steps to write a land contract agreement:
Perform negotiation under simple terms
The important terms are the down payment, purchasing price (total), any penalties for late installments, general rules and regulations, the term of the payment (say 20 or 30 years), and interest rate.
State the purpose with legal names
Write the purpose of the contract and legal identities of both buyer and seller on the first page. You can title the contract as “Contract for deed,” “Land contract,” or “Real estate contract” according to the convenience of both of the parties, which indicates the purpose of the whole agreement.
If one or both of the parties are registered companies, then put the legal name of the company there, and if the trade name is also different, then state who the buyer and seller here are.
Identify the property under a legal term
There should be a legal description of the title head to identify the property. The legal description is something that provides a lawful and clear definition of the property’s boundaries.
In other words, it is a written record about the piece of land to make your property legally evident.
Amount of down payment
Write down the amount of the down payment (if there is any). Sometimes the seller will delay the down payment until the first installment.
Also, mention the date by which the possession will get transferred from the seller to the buyer. It is typically the date the down payment /first installment is made.
Include the principal, interest rate, and date of monthly payments
List out the purchase principal, interest rate, the total purchase price (principal together with the interest rate), each installment date, and the amounts due in your legal land contract.
Your land contract should state whether the buyer can avoid the interest rate by paying early installments. Structure your installments in an equal monthly payment.
Mention default case and late payment charges
Creating a section that imposes late payment penalties and default conditions that benefit the seller.
This is the most important section because it states what to do if the potential buyer defaults.
Whether seizing the property or not providing a refund to the buyer without any type of foreclosure proceedings, all of these things are important to consider in this section.
A statement indicating the transfer of the title with signature lines
There should be a statement defining that the title is to be transferred to the buyer as soon as he/she has paid the total purchasing price.
Prepare a signature line defining the names of both the parties.
Does a land contract have to be recorded?
Upon the execution, a land contract should be recorded with the registrar of deeds or recorders’ office.
It is advised to record the land contract under 18 days and notice should be delivered to the seller’s obligation for conveying the property upon the completion of payment and buyer’s interest in having the same property.
When you are recording the land contract, the transfer fee must be due, and when the buyer gets conveyed under a deed, you can’t be charged for the transfer fee.
Is a land contract a good idea when buying a property?
With typical land contracts, you don’t need any involvement from lenders, banks, or real estate agents.
With a land contract, you can obtain multiple benefits compared to getting a mortgage loan.
Apart from that, all your additional expenses like credit underwriting and closing costs get eliminated automatically.
Benefits of a land contract for buyers
- A high degree of protection
- Able to get title insurance on your property
- When registering the sales in your country and with those restrictions, you can eliminate any possibility that your vendor is trying to sell your property again to any other person over the contracted period
- Property tax advantages and no mortgage interest
Benefits of a land contract for sellers
- Reduction in fees
- Earn a good selling price without the inclusion of closing costs
- Maintenance costs and tax liability lifted because the buyer has the responsibility of paying maintenance and taxes
There are multiple benefits associated with a land contract, and it is an excellent legal agreement for both buyers and sellers.
But at the same time, you should be aware of the legal terms, conditions, any foreclosure proceedings, the interest rate, and the period of the contract when the property gets transferred to you.
These are the important factors that you should keep in mind while writing or entering into a land contract and signing on the crucial dotted lines.
Rather than a traditional mortgage, a land contract will benefit you and help you get into your dream house.
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