How Does A Land Contract Work?

A land contract is an arrangement between a buyer and a seller of property that allows the buyer to make gradual payments to the seller rather than to the bank. It is often used in cases where the buyer wants to purchase a home but doesn’t have the credit rating to do so. While it is generally similar in style and substance to a mortgage, it is less restrictive in many ways but also less secure. It requires a level of trust between both parties in order to work effectively.

How A Land Contract Differs From A Mortgage

The main difference between a land contract and a mortgage is that with a land contract, the seller retains ownership of the property until the final payment is made. However, the buyer generally assumes all responsibility for care and maintenance of the property. Details of who retains which responsibilities are often spelled out in the land contract, and this may be negotiated between both parties.

The payment schedule often differs from a mortgage as well. Many land contracts are short-term agreements with either a balloon payment or opportunity for refinance at the end of the contract’s term. However, this can be negotiated between both parties as well.

Elements Of A Land Contract

Land contracts generally involve a down payment by the buyer as well as an agreement to make a periodic payment that includes the cost of home insurance, taxes and interest. The interest rate for land contract payments is generally higher than one would get at a bank. Also included are the terms of the contract such as who is responsible for repairs.

Legal benefits of ownership may also be conferred in the land contract, depending on the language written therein. It can be helpful to have an attorney look over a land contract before you sign it to ensure that the agreement is beneficial for yourself and your family.

Risks Of Land Contracts

While land contracts offer an attractive way to cut out the middleman in situations where the buyer needs financing, they can be risky as well. The seller is still on the hook for tax and insurance payments but may not actually live in the property. If the value of the home goes down before the buyer has finished paying it off, the seller will incur the cost of the devaluation.

Meanwhile, the buyer does not actually hold any legal title to the house yet is required to continue to make payments on it. If the buyer is unable to make payments, previous payments may not be recouped. The buyer may also be unaware of any outstanding liens on the property.

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