About Land Contracts
A land contract is a real estate agreement in which the seller also acts as the lender within the buyer-seller transaction. Land contracts are known for their convenience and low cost; however, certain protective provisions must be made to ensure a smooth purchase experience.
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Features
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A typical land contract includes an agreed upon purchase amount, monthly amounts, down payment amount, interest rates and, oftentimes, a large payment (balloon payment) to be paid at the very end of the loan. Since the agreement is made between the buyer and seller, any variety of payment plans and schedules can be arranged.
During the term of the contract, the buyer holds the title of the property. Once the loan is paid in full, the seller hands the title over to the buyer.
Benefits
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What makes a land contract agreement so appealing--to both buyer, and seller--are the reduced costs from not having to deal with a bank, a title company or a real estate agent. Also, the actual purchase transaction time is greatly reduced as there are no inspection requirements, title searches or middlemen to contend with unless the buyer or seller request such measures be taken.
The benefit to the buyer is the flexible requirements to land ownership. Should a buyer be unable to obtain a mortgage loan from a bank due to poor credit, a land contract agreement is a viable option to consider. Down payment amounts for a home bought along traditional channels can be large depending on the lending institution's requirements, while the down payment on a land contract is whatever is agreed upon between buyer and seller. -
Risk Factors
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The greatest risks to a land contract purchase agreement fall on the buyer's side. It's not uncommon for a land contract agreement to stipulate that any monies paid towards the loan revert to the buyer in the form of rental payments should the buyer miss an installment payment. As such, the buyer must thoroughly understand the contract terms before agreeing on the purchase.
In terms of the low costs in purchasing a land contract, monies saved in not utilizing a title company can come back to bite the buyer if tax liens or any other liens are on the property. At the very least, the buyer should do a title search, or have a title investigation done, to protect his own interests.
Misconceptions
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The buyer should determine whether the seller holds a mortgage on the property being sold. The assumption is payments being made to the buyer are being applied towards the mortgage, but this may not be the case. In the end, the buyer could be left with additional payments on the property if the seller has not paid off the mortgage.
Type
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Land contract requirements vary according to state, with few or no federal requirements involved. Because of the nature of the agreement, land contracts do not have to be filed with the state until the purchase transaction is complete. These conditions can put both buyers and sellers in precarious positions.
The agreed upon contract terms--the contract itself--is binding, so whatever is stated therein is the last word. Issues regarding who is responsible for property taxes and insurance throughout the term of the loan are examples of what terms should be spelled out in the contract. Buyers, specifically, should take some time to look into what set of contract terms are most conducive to their specific circumstances before actively looking into a land contract purchase.
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Resources
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