How Does a Land Contract Work?

A land contract, like any contract, is an agreement between two parties. A land contract is an agreement between a buyer or vendor, and seller or vendee for a deed to property. Laws governing land contracts vary from state to state but in most cases, the vendee has use of the land covered by the deed for the term of the contract, including any house or buildings on the land. Basically, a land contract is like an open lease (where the lessee can purchase the item at the end of the lease) or a rent-to-own agreement.

Like mortgages, land contracts generally involve a down payment by the vendee and a periodic payment based on the purchase price plus interest, insurance and taxes. Unlike mortgages, the deed to the property stays in the vendor's name and he is considered the owner. Like a lease, the vendee has the free use and enjoyment of the property and must perform regular care and maintenance.

Land contracts are used in times of high interest money as a way to avoid fees between buyers and sellers since they can set their own terms. Because of the lack of regulation, vendors are free to tailor an agreement and have a convenient way to dispose of property that they may need to sell. The vendor is guaranteed a completed sale or the return of her property. The vendee has virtual ownership of a property on more liberal terms than with a traditional mortgage.

Land contracts can be risky for both parties. Vendors lose the use of their property but continue to owe taxes and any mortgage they hold, regardless of the vendee's performance in paying on the agreed-upon schedule. They also stand to lose if the property declines in value during the vendee's occupation. Vendees have no material claim to the property since they do not hold title. They may also discover at the end of the contract that outstanding liens on the property must be paid off before they can take clear title. If a vendee breaks a land contract, the vendor keeps not only his property but also any payments made by the vendee.

Land contracts, like any legal instrument, should be examined by a competent real estate attorney to ensure guarantees concerning vendee/vendor rights, pre-existing liens and other state-specific issues. Although a "handshake agreement" may seem attractive, even the best-intentioned people have made serious mistakes on do-it-yourself forms that they have come to regret when a contract fails. A little legal advice on the front end of the deal is much preferable to a budget-busting balloon payment at the end.

Resources

• Land contracts benefits and drawbacks
• Legal aid of Southeast Michigan pamphlet with terms and general guidance