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.
Land Contracts Provide Seller Financing
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.
When Are Land Contracts Used
A land contract is type of contract that bounds the seller of a property to provide the buyer with the money to finance the property purchase. A land contract is a type of seller financing. A land contract can be used to purchase a single family residence, commercial property, or vacant land. In a land contract, the buyer purchases the property with a loan, but rather than obtaining a loan from a traditional lender, the buyer gets the loan from the seller.
Oftentimes, with a land contract the buyer uses the land contract on a temporary basis so they can retain the home purchase and later finance the home with a traditional home. A land contract can benefit both the buyer and seller. In instances when the seller is having a difficult time selling the home, they can offer seller financing to entice hesitant buyers to purchase the property. While it is not a common form of financing, is it a method to bridge the gap when traditional financing is not available. It is beneficial obviously for the seller because if the buyer opts for seller financing they can likely not qualify for a regular loan.
To make the land contract valid, both parties of the contract must agree to all the terms of the transaction. This includes the purchase price, terms of the mortgage, and conditions of the purchase.
Purpose of Land Contract
A land contract offers distinct advantages to both buyers and sellers. When buyers and sellers have no others means to get the transaction completed, a land contract offers a reliable means to close the deal.
How it helps buyers: It is common for some buyers to have the means to afford a property purchase however not have the ability to qualify for a loan. When this happens, a buyer can potentially get a land contract if the seller has the means to extend the financing to the buyer. In this scenario, the buyer would make mortgage payments to the seller.
How it helps sellers: There are instances when a home cannot be sold either because the price is too expensive or because a willing buyer cannot get a loan to purchase the property. When this occurs, sellers can offer seller financing to make it easier for buyers to purchase the home. In this situation, the seller acts as the lender. A seller that enters into a land contract may potentially be able to sell the property for a higher price because they can use their leverage as the lender and convince the buyer to pay more for the property.
Who Holds Title to the Property During a Land Contract
During a land contract, the seller still remains as the owner of the property, even though the buyer holds equitable title. Equitable title means the buyer has exclusive right to purchase the property because they have agreed to purchase the property and pay for financing on the purchase. While in a land contract, the seller cannot sell the property to any other party, regardless of whether another makes a better offer. The execution of the land contract grants the buyer the exclusive right to purchase the property.
