- A land contract is also called a trust deed or a contract for deed. It is a legal contract used in the purchase of real estate. A land contract can be used for the purchase of land or other types of real estate. Basically, a land contract is a seller financed real estate purchase. Instead of the buyer obtaining a loan through a bank or other mortgage lender, the seller of the property carries the financing.
- To purchase real estate through the use of a land contract, the buyer and seller sign a land contract agreement. The agreement states the buyer and seller of the property, the property to be purchased, the purchase price, interest rate and any fees, the length of the loan and penalties. Most land contract agreements state that the deed will be transferred into the buyer's name once the full amount of the loan is paid off. Sometimes a copy of the land contract agreement is recorded with the county recorders office in the county where the property is located.
- A land contract is useful for buyers who cannot obtain a conventional real estate loan through a bank. Sometimes a land contract, which is a form of owner financing is the only way that a buyer with bad credit can purchase real estate. Lack of a down payment is another reason that a buyer may look into purchasing with a land contract. Although most land contract agreements require a down payment, the down payment is often smaller than a bank would require.
- A seller often sells property through a land contract when the real estate market is slow. Selling with a land contract allows more people to qualify to purchase the property. A seller can make more money in the long run when he uses a land contract. A seller often sells the property through a land contract for a higher price. A buyer who cannot qualify for bank loans often will agree to a higher purchase price in exchange for an easy qualify loan. A seller also makes more money because of the interest. Since the seller is acting as a bank, he not only gets the purchase price of the house, he receives all interest payments. Selling through a land contract can also offer the seller tax benefits, because taxes are not paid on the whole purchase price at once. Instead the seller pays taxes on the monthly payments that he receives from the buyer.
- A buyer who purchases real estate through a land contract is not without possible risks. If the seller has a mortgage on the property or outstanding liens and does not make the payments, the property could be foreclosed on. The buyer could lose the property and the money that he paid into the property. Though the buyer could sue the seller, collecting money awarded in a judgment can be very difficult. Another risk the buyer faces is losing the property due to a late payment. The foreclosure process on a land contract loan goes very quickly. The seller can take the property back in as little as 30 days after the payment due date.
- If the buyer does not make timely payments, the seller could face financial difficulty. This is especially true if the seller has a mortgage out on the property. If a buyer does not make payments, the seller can foreclose on the property, but he will have to pay for court fees and legal costs. It may be impossible to ever recoup the money from the buyer.
- Any land contract should be reviewed by a real estate lawyer before it is signed. This is beneficial for both the buyer and the seller. A properly constructed land contract will protect both the buyer and the seller. A poorly constructed contract could leave the buyer or seller exposed to financial harm. A real estate lawyer can also assist the buyer in doing a title search to make sure that the seller does not have any liens on the property.
- This article is for informational purposes only and is not meant to act as or replace legal advice. Real estate law can be complicated and can vary by state. To protect your financial interests, always seek the advice of a real estate attorney when entering a land contract. Note: Unfortunately there are people who purposely scam people through land contracts. Buyers and sellers should use diligence in seeking legal advice to assure the contract is sound.
