What is a Land Contract?
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How Is a Land Contract Structured?
There are typically at least five elements specified in the agreement:
- Selling price. This is the purchase price agreed upon between the buyer and the seller. In many cases, the selling price is higher than the market price for similar properties simply because the seller is providing financing.
- Down payment. The down payment is typically non-refundable in a land contract and represents between 10–20% of the selling price.
- Interest rate. Again, this is generally higher than the market rate because the seller is financing the property. Average interest rates on seller-financed properties range between 4% and 10%. The seller can structure the loan as an interest-only, an adjustable-rate, or a fixed-rate loan, although a fixed-rate loan is most common.
- Term and balloon. Payments are generally based on a 15- or 30-year amortization with a three- to five-year balloon period. This keeps payments manageable for the buyer, giving them time to arrange for conventional financing.
- Monthly payment. This includes principal, interest, taxes, and insurance (PITI). Although the buyer has an equitable title to the property at closing, it is not uncommon for sellers to collect and pay taxes and insurance themselves.
|Monthly Payment (principal and interest)||$1,573|
|Balloon payment due at the end of five years||$212,646|
|Total paid to the seller||$296,265|
Who Holds the Deed in a Land Contract?
The buyer gets an equitable title at closing, but the seller holds the legal title to the property until the terms of the contract are satisfied. This is one of the most significant differences between a conventional mortgage and a land contract.
With a conventional mortgage, the deed is transferred to the buyer at closing. With a land contract, the transfer of the deed does not happen until the loan is paid in full.
This legal arrangement poses some risk for the seller, as they are legally responsible for the property during the term of the contract. It is up to the owner/seller to ensure that taxes are paid, the property is adequately insured, and the property does not violate any local ordinance.
Advantages and Disadvantages of a Land Contract
A land contract poses some risks for both the buyer and the seller.
The buyer has no legal claim to the property until the purchase price is paid in full. If the buyer defaults, they may have just 30 to 60 days to cure the default or be evicted, forfeiting all their payments plus any improvement they may have made on the property. Not only that, but there is also no guarantee that the owner/seller will not encumber the property with a lien.
The main disadvantage for the seller is that the property stays on their books until the purchase price is paid in full, and they lose the tax deductions they could otherwise claim. As the legal owner, the seller could also be subject to fines and lawsuits if the buyer/borrower alters the property in a way that violates any code or local regulation. Although there is a risk of a buyer default, the process to cure the default in many states is much quicker and easier than the foreclosure process on a mortgage. However, the specific procedure depends on state law and how foreclosures are handled.
The primary advantage for the buyer is that owner financing puts property ownership within reach when conventional financing may not be possible due to poor credit.
For the seller, meanwhile, financing with a land contract opens up a larger pool of potential buyers. A land contract may also fit with the seller’s tax strategy.
Land contracts are seller-financing agreements; the buyer makes loan payments to the seller instead of a bank or other lending institution. Depending on the area, a land contract may be called a contract for deed or contract for sale.
A land contract can help buyers who cannot qualify for traditional mortgage loans to get into a property. However, the buyer does not have legal title to the property until the loan is paid in full, which means that in many states, the seller can use a shorter eviction process to cure the default as opposed to a more lengthy foreclosure.
Where to Download a Sample Land Contract
You can download a land contract template at the following sites:
- Rocket Mortgage. (n.d.). Everything You Need To Know About Land Contracts. Retrieved from https://www.rocketmortgage.com/learn/land-contract
- Brumer, L. (Nov. 2, 2019). A Guide to Owner Financing. The Motley Fool. Retrieved from https://www.fool.com/millionacres/real-estate-financing/articles/guide-owner-financing/#
- Consumers Credit Union. (Aug. 13, 2018). The Difference of Land Contracts vs. Mortgages. Retrieved from https://www.consumerscu.org/blog/the-difference-between-land-contracts-and-mortgages