What is a “Land Contract” and What Purpose Does It Serve?
Author: Attorney Thomas J. Casey
A Land Contract allows for real estate to be sold on installment payments. In most real estate transactions, the Seller gets paid in full at closing when the real estate is sold. The Buyer either uses cash to complete the sale or finances some or all of the purchase price by borrowing the money from a bank or credit union. Then the lender takes a mortgage as collateral for the loan, until the loan is paid in full. Once paid in full, the mortgage is satisfied and the Buyer owns the real estate free and clear of any lien from the lender.
In certain circumstances, the Buyer may request the Seller to enter into a Land Contract. In many cases, the Buyer does not have sufficient credit to borrow the necessary funds to purchase the real estate, and is therefore unable to get a mortgage loan from a bank or credit union. In such an instance, if the Seller agrees to sell on Land Contract, the Seller becomes the “bank” and “lends” the money to the Buyer by allowing the Buyer to purchase the real estate by making monthly payments.
The parties must agree on a down payment and an interest rate for the transaction. Because the Seller is normally providing accommodation to a Buyer with below average credit, the interest rate may be somewhat higher than the standard market rate.
The terms of the Land Contract will define what period of time the Buyer has before a payment is considered in “default”. A “default” under the Land Contract will allow the Seller to start a foreclosure action, much like a mortgage foreclosure with a bank. There may also be a late fee applied to any payment not made on time even if the payment is well before the expiration of the “default” period.
If the Buyer successfully makes all of the payments under the Land Contract, it is necessary for the Seller to then execute and record a Warranty Deed in satisfaction of the Land Contract. Many times, the parties forget to complete this step and discover years later that a defect in title exists because nothing has been recorded showing the Buyer has completed the Land Contract.
The issues regarding use of a Land Contract and the terms and provisions of such a document should be discussed with an attorney before deciding whether a Land Contract fits your needs.