In an installment sale of a land contract, the seller of the property provides buyer financing for the purchase of the property. Also, known as an installment sales contract, a land contract is a real estate contract that turns over the property to the buyer without the deed until the buyer makes payments for an agreed upon duration.
The sales contract will provide details of the real estate transaction including but not limited to sale price, date of payment, and amount financed. A land contract is common for buyers who cannot qualify for a standard loan. Under this form of agreement, the buyer agrees to pay the seller the loan in installments. The loan typically includes a balloon payment to reduce the length of the loan term and subsequently terminate the seller’s interest. By paying down the principal amount, the buyer is increasing their equity and diminishing the seller’s interest in the property.
Because land contracts are written by buyers and sellers, individual terms of the agreement can be modified according to the wishes of both parties. Loan programs under a land contract may include interest only loans, PITI payments, negative amortization, balloons, and others.
In a land contract, as mentioned above, the seller retains title to the property, while the buyer has access to the property. Because of the complex nature of land contracts, buyers and sellers should consult their attorneys before signing any paperwork.
The main purpose of a land contract is to provide short term seller financing. Typically, when the loan is close to being paid off or the buyer has improved their ability to qualify from a standard lender, the buyer will refinance with a conventional loan, thereby terminating the land contract. Oftentimes, land contracts are utilized when the buyer cannot qualify for traditional financing or when there is not enough time to attain financing prior to the close date of the purchase contract.