Pros & Cons of Real Estate Land Contracts
In most real estate transactions, the buyer arranges financing with a third party lender and pays the seller the entire purchase price in lump sum. In a land contract, the seller finances the transaction and the buyer pays installment payments directly to the seller. Payment terms can be more flexible under a land contract because there is no need no deal with credit rules imposed by institutional lenders.
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Credit
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Buyers who have bad credit or no credit history at all may find if difficult to obtain financing from a bank, especially in a tight economy. If the buyer can convince the seller to finance the transaction, restrictive requirements imposed by third party lenders can be avoided. Nevertheless, if the buyer defaults on payments, the seller will likely report the default to credit bureaus.
Payment Flexibiity
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In many land contracts, the buyer pays a low down payment or no down payment at all. Buyers who cannot afford a large down payment may offer to pay a higher total purchase price in exchange for a low down payment. Buyers experiencing temporary financial difficulties may negotiate a graduated payment schedule that allows lower payments now and higher payments later.
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Red Tape
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Seller financing avoids many of the red tape associated with third party financing. In many cases these requirements will prove onerous to both the buyer and the seller, and result in significant expense for both. Third party financing results in delays while paperwork is completed, credit is checked, and the title is exhaustively examined for encumbrances and legal risks. For this reason, a land contact can offer advantages for both parties if they seek to complete the transaction as quickly and cheaply as possible.
Title
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Under a land contract, title is not transferred to the buyer until the last installment payment is completed. The seller not only keeps legal title in his name, he typically retains physical possession of the title document. For this reason, a land contract can be characterized as a real estate rent-to-own agreement. As long as the buyer does not default, however, he retains the right to exclusive possession of the property -- the seller may not enter the property without the buyer's permission, except for certain reasons such as health or safety violations.
Default
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If the buyer defaults on payments at any time, even on the last installment, he can be ejected from the property with no ownership interest in the property. For this reason, buyers should not agree to pay installment payments that are significantly more than the reasonable rental value of the property.
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References
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