How to Set Up a Land Contract
A land contract, or agreement for deed, is a private mortgage between the buyer and seller in a real estate transaction. While several variations of land contracts exist, most are structured the same as home loans made by banks. Some land contracts contain balloon clauses, while some are structured with closed-ended terms. Setting up a basic land contract is fairly simple if both the buyer and seller agree on the terms of the sale and financing.
Other People Are Reading
Instructions
-
-
1
Agree upon a sale price. Before you begin structuring the land contract, meet with the buyer and agree upon a sale price if you have not done so. If you don't have access to a sales contract, also called a contract-to-purchase, most office supply stores carry them. You also may obtain one online (see Resources). If you do not understand the contract's terms, contact a real estate attorney to help you.
-
2
Require the buyer to produce a down payment. Unlike a traditional real estate sale where you, as the seller, would receive the full sales price at closing, you won't receive cash unless you require a portion of the price of the home up front. Five to 10 percent of the sales price, or a pre-determined down payment ($10,000) amount is common. The remainder the sales price will be financed.
-
-
3
Decide up on an interest rate and amortization period. Your land contract must contain an interest rate and financing term (number of monthly payments), which will determine a payment amount you will receive each month. For example, if you are selling your home for $135,000 and your buyer produces a down payment of 10 percent ($13,500), you will carry a mortgage for $121, 500. If you charge your buyer 7 percent interest based on an amortization period of 30 years, his monthly principal and interest payment will be $997.95.
-
4
Consider a balloon option. Depending on when you, the seller, wish to be paid in-full, you may exercise a balloon clause. To utilize a balloon, require the seller to refinance into a bank loan or sell the property after a specific period of time. For example, you may require your buyer to pay you in full after 24 months into the contract. At the end of 24 months, he would owe you the balance of the financing. Keep records of each monthly payment and work off of an amortization schedule (see Resources).
-
5
Require an escrow for real estate taxes. Depending on your situation, you may choose to add a monthly charge to each payment to pay the annual real estate property taxes. This amount will be set aside and use to pay taxes when they come due. Requiring your buyer to escrow his taxes ensures the taxes will be paid on time without penalty.
-
6
Complete the land contract. After you've agreed upon financing terms with the buyer, plug the figures and conditions into a land contract template (see Resources). Include a copy of the purchase agreement with the land contact and furnish a copy to the buyer. Make sure to sign and date the document.
-
1
Tips & Warnings
Record the completed contract with your county's register of deeds office. This will place the real estate sale on record and protect the buyer and seller.
References
Resources
- Photo Credit Sold Home For Sale Sign on Burst image by Andy Dean from Fotolia.com
