A land contract, also called a contract for deed or an installment sales agreement, is an agreement in which a buyer purchases a home or other real estate package and is financed by the seller instead of a bank or other lending institution. In the agreement, the buyer makes installment payments directly to the seller. Under certain circumstances, this can be an ideal solution, especially in a housing market in which it is difficult to obtain a mortgage or to sell a home at a fair price.
Different from a Mortgage Loan
When you purchase a home or real estate package via a traditional mortgage loan, you will receive the deed to the property upon closing. When you purchase a package through a land contract agreement, the seller retains the deed and you receive an equitable title that proves you have a financial interest in the property only. You will receive the deed upon the final pay-off of the contract.
Why Buy with a Land Contract?
A land contract can be an ideal answer for buyers who cannot obtain a traditional mortgage due to credit or debt problems. The seller can choose to offer a land contract agreement to a prospective buyer at his or her own discretion. The option offers an opportunity to own a home to those who may not otherwise have the option to do so.
Terms and Conditions
The terms of a land contract are spelled out and decided upon by the seller. There is very little regulation to the terms and conditions of these loans as there would be for mortgages. Mortgage lenders are strictly regulated by a government entity, while individual loans between private parties are not. Therefore, it is in the buyer's best interest to involve a real estate lawyer who understands land contracts to review the agreement and ensure that they are protected. If the buyer is not thorough in ensuring that all details are included in the contract, he may lose in the long run.
Both Parties Can Win
If the agreement is well written and both parties are well informed, a land contract can be advantageous to both. The buyer is able to purchase a home at a fair interest rate, when he might not have been able to do so with a traditional mortgage loan. The seller, when he can afford to do so, is able to ensure a monthly income that will amount to a fair price for his property, and if the buyer is unable to pay off the contract, the property simply reverts back to the seller to sell to another buyer.
There are risks involved for both parties as well. Without the regulations involved in the mortgage process, either party can more easily default on a land contract. Sellers can overstep their limits on their rights to the premises, and buyers could damage the property without legal recourse. These are additional reasons why the agreement should be initially reviewed by lawyers representing both the buyer and the seller before any papers are signed.