It's pretty common to find a potential home Buyer who can afford the monthly payments of home ownership, but who hasn't saved up enough money for the down payment needed to qualify for a mortgage.
It's also common for a Seller to find a potential Buyer who has saved up the down payment money AND has the ability to make the monthly payments on the home, but who has too low of a credit score to obtain traditional bank financing.
When a real estate transaction can't be finalized for either reason, it's expensive and time-consuming for the Seller and emotionally frustrating for the Buyer.
But there is another option may make sense for the Buyer and Seller to consider: a direct transaction for that real estate through a Land Contract.
Under a Land Contract, the Seller provides the financing for the home purchase without an outside lender or bank.
While it's clear that such an option is great for the Buyer, a Land Contract can prove highly beneficial to the Seller in a number of ways, too.
Selling property through a Land Contract can provide a quicker and less expensive way for the property owner to move the home: the Seller does not need to comply with the often rigid and tedious guidelines of bank financing or the delays that often accompany those guidelines, or pay the fees associated with loan closing costs.
Also, real property sold on a Land Contract can often be priced slightly higher than a sale done with bank financing. Since the Seller provides the all-important financing and the Buyer is often not required to come up with as large of a down-payment amount as a bank may require, these benefits allow the Seller to request a slightly higher asking price for the property.
And of course, the Seller is also earning interest on the money he is 'lending' to the Buyer, even though that loan is not provided as an out-of-pocket transfer of cash.
Since a Land Contract seems to have plenty of benefit to both parties, let's examine the true nature of buying and selling real estate via this 'contract for deed'.
So how exactly does a Land Contract work?
Land Contracts are common throughout the United States. In some states, they are called Trust Deeds, Contract for Deed, Deeds of Trust, Home Notes, or Privately Held Mortgages. Regardless of the name used, they all represent the same thing: a way of selling property where the Buyer "borrows" from or relies upon the Seller for the financing, rather than paying cash up front or borrowing money from a bank.
The process is generally as follows:
The Seller and Buyer enter into a contract that normally states that the Seller shall transfer ownership of the property to the Buyer after he or she has fully paid the Seller the agreed upon purchase price. In most cases, the contract requires the Buyer to make a very modest down payment and then to make monthly payments over time. Most Land Contracts require the Buyer to pay the Seller interest on the money owed (just like a bank would collect).
Also, because the Buyer and Seller privately negotiate and reach their own sales terms, the contract can reflect any arrangement comfortable between the parties: the contract can call for smaller monthly payments; a varying payment or interest rate as outlined in the contract; or a balloon payment or lump sum payment to pay the balance of the purchase price for the property at an agreed upon date.
During the term of the Land Contract (i.e. while the contract is in force and effect, the Buyer is not in default, and until all of the payments are made), the Buyer holds legal possession of and occupies the property. The Land Contract can call for transfer of the property once the Seller has received all of the required payments, or can call for the transfer at some time sooner with the Seller then holding a mortgage on the property to ensure that the balance of the purchase price will be paid in full.
Whatever the terms agreed upon for transferring ownership, when the agreed upon transfer date is reached, the Seller tenders (or gives) a deed to the property to the Buyer who then records the deed in the county recorder's office or the real property office of the county where the property is located.
While the benefits of Land Contracts are many, there are some potential pitfalls to a Land Contract for which the parties must be aware.
If the Buyer misses any payment under a Land Contract, he or she may lose claim to ownership of the property (the right to have the deed transferred to him) and the Seller may keep the money paid up to that point as 'rent'. Thereafter, the Seller would NOT be required to transfer the deed to the Buyer. Note, however, that some states have laws providing that if a Buyer makes a majority of the payments under a Land Contract (total of all payments which cover a large percentage of a purchase price of the property), the Seller may not be able to keep or refuse to transfer the deed if the Buyer can make payments on the contract price at a later date (known as the right of redemption). Your state's laws should be reviewed in advance of creating the contract so that both parties are clear as to their rights and responsibilities.
Another disadvantage for the Buyer can be found when the Seller has an existing mortgage on the property that the Buyer is purchasing by Land Contract. If the Seller does not payoff the existing mortgages before the time the Buyer pays off the entire purchase price outlined in the Land Contract, the transfer of the deed can become an issue as there still is a claim to the deed from the Seller's original mortgage. The Buyer should determine in advance whether or not any mortgages exist on the property being purchased, and then require by contract that the Seller to pay off all mortgages prior to the final payment being made on the contract, with penalties should the Seller fail to do so. But be advised that if the Seller does not adhere to such stipulations, the Buyer may be required to pay off the mortgages that encumbers the property before the deed can be transferred.
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