In many cases, home buyers are in a financial position to afford the monthly payments associated with home ownership, but they lack the down payment necessary to purchase a home. Or the buyer’s credit score or rating may prevent him or her from obtaining the traditional bank or mortgage company financing required for the purchase of a home. When this is the case, it often makes sense for the buyers to consider purchasing a home or piece of real estate and have the owner/seller provide the financing for the purchase – called a Land Contract or Contract for Deed.
Likewise, selling a home by way a land contract can prove beneficial to the seller in many ways. Selling property with a land contract can provide a quicker and more inexpensive way for the property owner to sell the property – the seller does not need to comply with the often rigid and tedious guidelines of bank financing and the delays that often accompany those guidelines. Likewise, real property sold on a land contract can often be priced higher than sales with bank financing since the seller provides the all-important financing and the buyer is often times not required to come up with a large down-payment, thereby permitting a higher asking price for the property.
So how does a land contract work?
Land contracts are common throughout the United States. In some states, they are called Trust Deeds, Contract for Deed, Deeds of Trust, Notes, or (privately held) Mortgages, but they all represent the same thing: a way of selling property where the buyer “borrows” from or relies upon the seller for the financing rather than paying cash up front or borrowing from a bank.
The process is generally as follows:
The seller and buyer enter into a contract that normally states that the seller shall transfer ownership of the property to the after the buyer has fully paid the seller the agreed upon purchase price. In most cases, the contract requires the buyer to make a modest down payment and then to make monthly payments over time. The land contract can require the buyer to pay the seller interest on the money owed (just like a bank would). Also, because the buyer and seller privately negotiate and reach their own sales terms, the contract can also call for smaller monthly payments – beneficial to the buyer – and then a balloon payment to be made at some certain period of time; this balloon or lump sum payment will pay the balance of the purchase price for the property.
During the term of the land contract (i.e. while the contract is in force and effect, the buyer is not in default and until all of the payments are made), the buyer holds legal possession of and occupies the property. The land contract can call for transfer of the property once the seller has received all of the required payments or can call for the transfer at some time sooner, with the seller then holding a mortgage on the property to ensure that the balance of the purchase price will be paid in full. Whatever the terms agreed upon for transferring ownership, when the agreed upon transfer date is reached, the seller tenders (or gives) a deed to the property to the buyer who then records the deed in the county recorders office or the real property office of the county where the property is located.
While the benefits of land contracts are many, there are some potential pitfalls to a land contract that the parties must be aware.
If the buyer misses any payment under the land contract, he or she may lose the property (the right to have the deed transferred to him) and the seller may keep the money paid up to that point as rent. Thereafter, the seller would not be required to transfer the deed to the buyer.
Some states have laws providing that if a buyer makes a majority of the payments under a land contract (which cover a large percentage of a purchase price of the property), the seller may not be able to keep or refuse to transfer the deed if the buyer can make payments on the contract price at a later date (known as the right of redemption). Your state laws should be reviewed.
A disadvantage for the buyer can be found when the seller has a mortgage on the property that the buyer is purchasing and the seller does not payoff existing mortgages by the time the buyer pays the entire purchase price – thereby causing the property to subject to foreclosure. The buyer should determine whether or not any mortgages exist on the property being purchased and then require the seller to pay off all mortgages prior to the final payment being made – but if the seller does not, the buyer should be aware that he or she may be required to pay off the mortgages.
Author: Christopher Freeman
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