Last updated December 15, 2022
What is a Land Contract?
A Land Contract, also called a Contract for Deed, is a written
agreement that
outlines a seller-financed real estate purchase.
With a Land Contract, the buyer purchases a piece of real estate by
paying the seller in installments. The seller keeps the
property’s legal title in their name until the buyer has paid
the total price. Once the buyer has paid in full, the seller
transfers the legal title to the buyer.
Land Contracts are an
alternative to traditional mortgage financing. Sometimes buyers are unable or unwilling to get a mortgage
through a bank or other lending institution. Instead of qualifying
for a mortgage, a buyer can pay the seller directly.
A Land Contract is also known as a:
- Contract for Deed
- Installment land contract
- Bond for deed
Land Contracts can be used to sell residential properties,
commercial properties, or undeveloped land. Family members and loved
ones sometimes use Land Contracts to conduct private real estate
transactions.
How does a Land Contract work?
Generally, a Land Contract is
between a buyer and seller. There can be multiple
buyers or sellers involved in a real estate transaction. For
example, spouses may sell their jointly owned home to another
couple. Unlike a mortgage,
a Land Contract does not involve a third-party
lender, such as a bank, lending institution, or private individual.
Before a buyer and seller can create and execute an enforceable Land
Contract, they must negotiate important contract terms, such as a
purchase price, interest rate, and late payment penalties. Without
agreed-upon terms, their agreement will not be a
legally enforceable contract.
Once the parties execute their Land Contract,
the buyer pays the seller monthly installments
according to their agreed-upon schedule. During this time,
the seller keeps the property’s legal title in their
name, and the buyer has the equitable title.
In most Land Contracts, monthly payments are usually similar to
mortgage payments. A portion of the payments goes toward the
purchase price, and the remaining goes toward interest.
Depending on the agreed-upon terms, the buyer may be allowed to make
lump-sum payments on the balance at any time.
Once the buyer has paid the total purchase price, the seller must
transfer the legal title
to the buyer with a property deed. This obligation explains why a
Land Contract is also known as a Contract for Deed. It is an
agreement that the seller will complete a property deed transfer
once the buyer has paid off the purchase price. A
Warranty Deed
is a responsible way to transfer a title because it ensures that the
title is free and clear.
States have different statutes that govern Land Contracts, so it is
essential to understand
your state’s Land Contract laws
before executing your document.
Unsure which deed is right for you?
Let our Which Type of Real Estate Deed Do I
Need? tool recommend the best deed for your unique
situation.
Answer a few simple questions and we'll suggest the
deed for you!
|
Land Contracts versus mortgages
Sometimes buyers cannot get a mortgage through a traditional lender.
In addition, a buyer may not have a private, individual lender with
whom they can enter a
Mortgage Agreement.
In these cases, a Land Contract can be a valuable alternative. A
buyer may not qualify for a mortgage due to various factors, such as
a poor credit rating, an insufficient down payment, or unsteady
employment status.
Alternatively, some buyers may qualify for a mortgage but be
hesitant about higher interest rates or expensive closing costs.
Both help buyers purchase property, so it makes sense that Land
Contracts and mortgages have some similarities but also some
fundamental differences.
Similarities between Land Contracts and mortgages
Land Contracts and mortgages are both types of home financing,
meaning they are both methods by which a buyer can buy a home
without paying all at once. Generally, buyers provide down payments
with both Land Contracts and mortgages.
A mortgage allows the lender, such as a bank, to take possession of
the property if the buyer defaults on their payments. A Land
Contract functions much in the same way.
If the buyer does not pay, the seller has the right to take
legal action
to obtain possession of the property.
Differences between Land Contracts and mortgages
Here are the key differences between a Land Contract and a mortgage.
Land Contract
|
Mortgage
|
Between a buyer and seller |
Between a buyer and a third-party lender, such as a bank
or private lender
|
Gives the buyer equitable title
|
Gives the buyer legal title
|
Fewer qualifications |
Strict requirements
|
Fewer protections for buyers and sellers
|
Stronger protections for buyers and sellers
|
Lower closing costs |
Higher closing costs
|
What does a Land Contract include?
A correctly executed Land Contract has components that ensure its
enforceability. In this section, you will find the key pieces a Land
Contract must include.
Purchase price
Without a mutually agreed-upon purchase price, the Land Contract
cannot be binding.
Payment plan
Once the buyer and seller negotiate a purchase price, they must
determine a payment plan which may include a down
payment. Unlike with mortgages, buyers may be able to provide a
smaller down payment or, in some cases, no down payment.
In addition, a Land Contract should specify the amount of each
monthly payment, the first payment due date, and the day of the
month on which all subsequent payments are due.
Interest rate
A Land Contract must
specify if the seller is charging interest. Our
template compounds interest monthly. Depending on the parties'
relationship, the seller may not charge interest. For example,
someone selling their home to a family member may not be looking to
profit off the buyer, despite the financing risk.
Before setting an interest rate, sellers should consult their
jurisdiction’s
usury laws
regarding interest rate limitations.
Default protocol and penalties
A buyer defaults if they violate the agreement or fail to make
timely payments. In a Land Contract, the seller can require the buyer to pay a fee
for late payments.
Our template outlines that buyers have 14 days to fix a default. If
a buyer fails to fix the default, the buyer may have a period to pay
the purchase price balance. A seller can also specify the period the
buyer has to leave the property if the agreement is terminated.
Rights and obligations
Besides the basic contract terms, like a purchase price and interest
rate, a Land Contract should specify
which party is responsible for property taxes and
insurance
during the agreement.
A Land Contract should also outline the purchaser’s inability
to assign the purchase to another party and the seller’s
obligation to transfer the property title once the buyer has paid
the total price.
What are a buyer’s rights under a Land Contract?
Under a Land Contract, the buyer holds the “equitable
title” to the land until they have paid the full purchase
price.
The equitable title is the right to build equity and eventually
acquire the legal title to a property. The legal title, also known as the property title, is the
absolute ownership of a piece of real estate and can only be
transferred with a property deed, such as a
Quitclaim
or
Warranty Deed.
So, although a buyer does not have the legal title while making
payments, they have the right to obtain it once the terms of the
Land Contract have been fulfilled.
While holding the equitable title,
the buyer has the right to possess the property
physically. The equitable title can be thought of as the right to enjoy the
property.
They also have
the right to benefit from any appreciation of the
property’s value. For example, if a property doubles in worth one month after a
buyer and seller execute a Land Contract, the buyer has the right to
obtain it and benefit from the property appreciation. The seller
cannot back out of the deal or change the original agreed-upon
purchase price.
Advantages of Land Contracts
As an alternative form of financing, there are many benefits to Land
Contracts. Here are some of the main advantages for both buyers and
sellers.
Buyer advantages
|
Seller advantages
|
Negotiable closing costs
|
Can sell property as-is
|
Quicker closing process
|
Can close a sale quickly by cutting out third-parties
|
No down payment requirements
|
Can keep the property title under the seller's name
while the buyer makes payments
|
No income requirements
|
Can enjoy a periodic income stream
|
Disadvantages of Land Contracts
While Land Contracts offer many benefits for buyers and sellers,
there are also some risks. Before executing a Land Contract,
it’s essential to understand these risks.
Buyer disadvantages
|
Seller disadvantages
|
Potential to pay a high interest rate
|
Risk of the buyer defaulting
|
Risk of the buyer losing the property and their money if
the seller has an existing mortgage and doesn't make
their monthly payments
|
May have to check the limitations on interest rates
|
|
Will not obtain the full purchase price all at once
|