Land Sale Contracts: Everything You Need to Know
A land contract is a written document that is used to buy a piece of real estate, which could be a house, apartment building, commercial structure, or vacant lot. 3 min read
Land sale contracts are a method of home buying that became popular in the 1970s and early ‘80s because they offered better rates and easier qualification than traditional mortgages. The popularity began to wane when loan requirements were lowered and mortgage rates dipped, but land sale contracts have recently returned into the real estate market.
Land sale contracts, which are also called installment sale contracts and contracts for deed, were used as an alternative form of financing by previous homeowners who were foreclosed or otherwise had a poor credit history.
How Does a Land Contract Work?
A land contract is a written document that is used to buy a piece of real estate, which could be a house, apartment building, commercial structure, or vacant lot. The seller keeps the property's title until the buyer makes enough payments to meet the price agreed upon for purchase. While the payments are being made, the buyer may take possession of the real estate but does not officially own it yet.
A land contract is like a traditional mortgage, but instead of making payments to the bank or other financial organization, the buyer is making payments to the real estate seller. It is also referred to as “seller financing.” Both the buyer and seller sign the contract, which covers the sale's terms and conditions. When the purchase price is paid in full, the title deed passes to the buyer.
Land contracts typically include the following items:
- Description of the property that is being financed
- The price agreed upon for purchase
- How many installments, or payments, will be made
- Property insurance
- Property taxes
- A calculation of loan interest
- Penalties for late payments
One of the most common uses for a land sale agreement is for agricultural property sales. This allows farmers to use large parcels of land for agricultural purposes without first buying the land.
Advantages of Land Sale Contracts
Land sales contracts have advantages for both buyers and sellers. They can allow the sale of property to buyers who may not be able to qualify for a traditional mortgage. The seller may be able to get a higher price for their real estate by offering to finance it with a land contract. They may also be able to get a large cash down payment at the outset.
Disadvantages of Land Sale Contracts
There are disadvantages to land sales contracts as well. For one thing, the seller doesn't get paid the full amount right away, as they would in a traditional cash or lender-financed sale. It's also possible that the seller may still owe money on the property, so they will still need to make those payments.
If the seller has an outstanding loan, the rights of the buyer may be limited. If the seller does not make payments, the lender could foreclose on the property. This means the buyer would not own the property despite having made all of their regular payments. The property buyer could lose everything invested in the property.
It's possible for the seller to terminate the land sales contract agreement. The seller could also keep the deposit and all payments up to that point, along with any improvements the buyer has made to the property. In such cases the buyer could get some of the money back but would need to go to court to do so.
Buyer's Rights to the Property
While the payments are being made from the buyer to the seller, the buyer has “equitable title.” This means that the buyer has certain rights to the property. The seller may not sell the property to another buyer or use that property as loan collateral, or for any other purpose that would result in a lien against it. Even so, the seller keeps legal title to the real estate until the final payment is made.
What If the Buyer Doesn't Pay as Promised?
If the buyer does not make the monthly payments as agreed, the seller can file for land contract forfeiture in court. In this case, the buyer would lose all money paid to the seller and any interest they had in the real estate.
When the seller agrees to a land contract, the seller is taking a risk because the seller is not getting the full purchase price when the sale takes place. However, the seller is protected by a forfeiture right and also the large down payment required from the buyer.
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