Are you signing a land contract commercial property? It's important you understand what this type of contract entails. An agreement to purchase a piece of property at a future date is referred to as a land contract. It is basically a rent-to-own agreement entered into between parties, and the contract is not considered a purchase transaction.

Other Names for Land Contracts

Depending on the state you are in, land contracts may also be referred to as:

  • Trust Deeds.
  • Deeds of Trust.
  • Home Notes.
  • Privately Held Mortgages.
  • A contract for Deed.

What Happens With a Land Contract?

When a land contract is entered and in effect, the buyer takes possession of the property, but the responsibility of paying the mortgage and taxes lies with the seller. The seller will hold the deed, meaning the seller still owns the property, until all obligations and terms of the contract have been met. The seller determines the terms of the contract, such as down payment, interest rate, who will pay for the taxes, who will carry the insurance and pay premiums, and the number of installments.

Is a Land Contract a Tool of Conveyance?

A land contract is not considered a tool of conveyance, but a tool used as an agreement to convey land at a future date. Again, the legal title to the property is not received by the seller, until the debt has been satisfied and all the terms and obligations of the contract have been met.

What Must Buyers Do When They Enter Into a Land Contract?

According to most land contracts, the buyer has physical use of the property once the contract is signed. Buyers are normally expected to maintain the property and make any and all repairs as needed, just as if they were the owners. When the land contract expires or matures, the buyers are then expected to pay off the land contract. There is a closing date set, and at closing, all parties are paid, including realtors, if any were involved.

How Is a Land Contract Made Official?

To make it an official record, the land contract is recorded at the county clerk's office. While a land contract is in effect, the seller cannot sell the property. Buyers may enter into a land contract agreement for various reasons, such as when a buyer hopes and intends to improve their credit while renting to own the property, or when a buyer expects an increase in income. This allows buyers extra time, so they can then be approved for a loan and fulfill their obligations at the contract's end.

A seller may choose to enter into a land contract agreement if the property is not selling as quickly as they would like or perhaps they feel confident the potential buyers are most likely going to qualify for a regular loan eventually.

Are Some Land Sellers Scam Artists?

Sellers may enter into a land contract and require a sizable down payment to be made. At times, this is done secretly, knowing the buyers will most likely default and forfeit the down payment. Sellers are satisfied operating like this as long as they have gotten a monthly rent payment and have acquired the sizable down payment.

Sellers who operate under such practice are considered land contract scam artists since they are knowingly and willingly taking advantage of those who will most likely not qualify for a loan and are likely to default.

Who Favors Land Contracts?

Buyers who are more likely to enter a land contract agreement are those who do not have access to necessary funds for an equity payment at a loan institution or those who need a lower interest rate than what they can get at a commercial lender. To reduce the initial amount of capital and instead of having to wait for a later date to get a traditional loan, a commercial buyer may favor a land contract agreement.

How Do Land Contracts Vary?

Contracts will vary according to the terms a seller wishes to establish at initiation. Most sellers will set the financing rate, terms, and conditions of ownership, and a description of how the title will be transferred to the buyer once all the terms and conditions have been met. This allows the seller to charge a higher interest rate and include a balloon payment if the seller chooses. Many times a seller may choose to allow a buyer to pay the final balance or renegotiate the terms of the loan if they are unable to pay the loan in full.

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