A land contract is a legally binding agreement between buyers and sellers of real estate allowing settlement of payment in installments within a specified period until the total price is paid in full. Transactions using a land contract are similar to a mortgage where the buyer does not use traditional third-party lenders but rather makes payment from their pocket.
Land contracts are legally binding agreements that must meet state requirements and should outline the payment details the buyer and the seller have to agree on. Installments can be made month-to-month or quarterly, provided it is agreeable between the two parties. The buyer can also demand the last balloon payment after a given period through a land contract to settle the debt.
A land contract is a wholesome and precise record and proof of transfer of ownership of property from a seller to a buyer. It will typically give a closing date for the transaction, after which, if the total owed amount is not paid, the seller can choose to keep any money paid as a deposit.
A land contract is also known as;
- Contract for deed
- Land instalment contract
- Agreement for deed
- Instalment sale agreement
- Agreement to purchase and sale
Land Contract Calculators
Land contract calculators are websites that allow individuals to enter information for new or existing land loans in order to calculate how much they are expected to pay as installments.
Land contracts are useful documents for people who want to acquire property but are unable to raise the full asking price or are unable to get a loan from financial institutions. There are two ways a land contract can benefit a seller; it attracts more prospective buyers and provides him or her flexibility to negotiate a higher asking price.
Types of Land Contracts
Land contracts will differ depending on the type of property transaction. As a result, there are different types of land contracts.
We shall look into these types below;
Instalment sale land contract
An installment sale contract is a type of agreement used in an installment sale of property that calls for periodic payments. An installment sales contract will typically outline the sales price, down payment, interest rate, number of periodic payments, and the responsibilities of each party, for example, who will be in charge of property maintenance, insurance, taxes, etc. Customarily it would be the buyer. The title of the property is held by the seller or an escrow company or attorney during the payment period and handed to the buyer once full payment is made. Normally, an installment sale contract will have a forfeiture clause that permits the seller to terminate the contract, regain possession of the property (legal title) and retain all payments (equitable interest) made upon the buyer’s default.
This article will look into how installments work when the property owner acts as the financier. Fundamentally, an installment sale works similarly to a mortgage; as earlier mentioned, the only difference is that the seller acts as the financier (lender) by awarding the buyer equitable title and holding the legal title until the full price of the land is paid fully. The equitable title is interpreted as the right to use and possess property, while the legal title is the right to sell. This means the buyer does not become the outright owner of the property immediately but rather after all payments have been made.
The periodic payments made by the buyer are part principal and part interest. The more installments a buyer pays overtime, their equity in the property increases (equitable interest) as well. An example of how equity is achieved is as follows;
If the property is valued at $20000 and the seller is asking for a $4000 down payment, the seller is expected to lend the buyer the remaining $16000, which is to be paid in installments. If the buyer pays $8000 in installments after a given period, he or she would have paid $12000 in total, which is 60% the value of the property, thus giving him or her a 60% equity (equitable interest).
Installment sale contracts have fewer formalities and offer greater flexibility than traditional mortgages, proving more advantageous to buyers and sellers.
Wraparound land contracts
A wraparound contract is a type of contract that allows the sale of property already under mortgage through a mortgage with a higher asking price and higher interest rate. The buyer makes payment through installment that is inclusive of a down payment and interest, and upon receipt of payment, the seller pays the underlying mortgage and keeps the remainder, known as an override. The seller transfers the land title to the buyer once the new mortgage is set in motion.
A straight contract is one where there is no overriding meaning. The buyer pays what the seller owes under the previous mortgage. The buyer can choose to pay the lender directly and also pay what they owe the seller or pay the seller, who in turn disburses payment to the existing lender.
Power of sale
A power of sale clause is used in a mortgage to invoke the right of foreclosure, allowing the seller or a trustee (Title Company) to sell the property if the buyer defaults on payment. This is in the effort of securing the remaining balance of the loan. Before invoking the power of sale clause, the buyer should be issued a notice. Property should not be resold:
- If the buyer pays the balance in full.
- If the buyer reaches out to the seller to have the loan payment plan revised.
- If the buyer files for bankruptcy
- If the buyer chooses to sell the property as a short sell.
The foreclosure process will vary from one state to the other but will ordinarily begin once the buyer misses making a number of payments compelling the trustee to auction the property.
Lease to own
It is important to note that a land contract is different from a lease to own in the following ways.
|Lease to own||Land contract|
|It is typically a property leasing contract that provides the buyer with an option to purchase at any point in the leasing period||It is a property purchasing agreement|
|The renter pays monthly rent for the use of the property||The buyer pays monthly installments that are subtracted from the total selling price|
|The renter pays a down payment that is customarily non-refundable but credited to the purchase price should they choose to buy the property||Down payment is only non-fundable should the buyer fail to make payment|
|It has a limitation when it comes to the deadline for purchasing (commonly 4 years maximum)||There is no limitation for the period of payment as long as both parties have agreed.|
Crafting a Land Contract
A land contract is as exceptional as it is written and structured. This creates the need to clearly understand the entire process of writing a land contract, as is discussed below.
Title for the land contract
The first thing should be to create a title for the contract. The title should be reflective of the contents of the agreement. It should be in bold and centered at the top of the page. It can be a “Land Purchase and Sale Contract,” “Contract for Deed,” etc.
Secondly, the effective date of the contract should be indicated. It can typically the date when the document was created. It should be reflective of the day, month, and year.
Provide details of the parties to the contract
The official names and addresses of the concerned parties should be outlined next. Each party should be identified by the title, which they shall be referred to throughout the contract. The names and addresses should be as they appear on official records.
The next step should be to provide a legal description of the property to be traded. The description should illustrate the physical size of the property and its location. A legal description of the land can be obtained from a recent deed, ownership affidavit, or from the recorder’s office if the other two are not available. Size should be given in square footage or acreage. The location should be given down to the street address.
Tax parcel information
The contract should then show the property’s tax parcel information. The tax assessment office will normally assign a Parcel ID number or the Tax map and lot, which should be written at this point to clearly identify the property for tax purposes. This information can be obtained from the local tax office.
Additional land definitions
If the property has any additional information that is used to identify it, it should be written down at this point. This information can be reflective of important landmarks within the property or the irregular shape of the property.
Earnest money is money paid as a deposit to show intent or commitment to buy or reserve property to be purchased. It is meant to cushion the seller in case the buyer fails to make the purchase. The amount paid as earnest money should be declared next in the contract. The date when this payment is expected should be indicated by date, month, year, and time for specificity. Earnest money can be refunded or deducted from the purchase price at the closing, and whichever the case, the contract should indicate appropriately.
Cost of the land
The next step in writing a land contract should be to indicate the amount the buyer is expected to pay as purchase price to receive ownership of the property. It should be given in figures, numerically, and the monetary unit in which it was calculated.
Down payment, unlike earnest money, is automatically part and a portion of the purchase price. The larger the down payment in a land contract, the greater the chances of a buyer to be approved and the lesser the installments they will have to pay. The contract should declare the down payment at this juncture. The due date should also be included.
There are several ways buyers can employ to raise funds for the purchase of a property. The first option is paying the total amount upfront. Some buyers can afford to pay the asking price in full without a loan or financing. This alternative is regarded as an all-cash offer. If such is the case, it should be clear in the contract. Normally documentation will be necessary for verifying the funds. The contract should state the deadline for verifying these funds by date, month, year, and time.
If the buyer will be using a bank as their financier, it should be indicated in the contract. The contract should indicate what type of financing the buyer will be using. There are several types, as outlined below.
- Conventional loan – A conventional loan is a type of homebuyer’s loan offered and secured by a private lender, not the government.
- FHA loan – A FHA is a type of loan for a mortgage that is issued by the Federal Housing Administration-approved lender and insured by the FHA.
- VA loan – A VA loan is a type of mortgage loan available to veterans, service members, and selected military spouses that is offered by private lenders but guaranteed by the US Department of Veterans Affairs.
- Other – If the buyer obtained funds by other means, it should be indicated in the contract.
Letter of credit (LOC)
A letter of credit (LOC) is a document issued by a financial institution promising the seller that they will receive the exact amount they are owed at the specified time. The date when the letter is expected to be received should be indicated.
A LOC guarantees payments will be paid on time, and the bank assumes liability should the buyer fail to make payment. Commonly, the consequence will be to terminate the sale by issuing a termination notice. However, the consequences of not issuing a LOC should be stated in the land contract as well as the number of days past the due date that a notice will be sent.
The other alternative for raising funds is having the seller provide the finances through credit. If such is the case, it should be stated in the contract, and the following should be declared.
- Loan amount – The loan amount is the principal amount owed. The exact amount should be indicated numerically and in monetary units.
- Down payment – The contract should clearly show in numerals and monetary units how much is to be paid as a down payment.
- Interest rate – At this section, state the applicable interest rate and how it shall be calculated (monthly or annually).
- Term – The term of contract is the period within which the purchase price is expected to be cleared. It can be given in months or years, usually dependent on how the interest is compounded. Therefore, indicate the first date of payment and the last due date. These dates should appear as date, month, and year.
Sale of another property
The purchase of a property sometimes depends on the buyer’s sale of his or her personal property. This sale of another property also needs to be declared in the land contract. Ensure that the property to be sold by the buyer is identified by stating its location and by indicating its mainlining address. Indicate the number of days after the effective date of the deed contract when the buyer is expected to close the sale of their original property. This is important as it sets a timeline avoiding a situation where the seller, of the property being discussed under this agreement, is expected to wait indefinitely for this sale to be closed.
Ordinarily, the sale of a property sale will come at some costs, during the term of the land contract or at closing. These costs include fees for recording with local jurisdiction, title search fees, licenses, etc. Since both parties (buyer and seller) have an interest in the deal, it would only be right for each party to have obligations assigned to them. Declare which party will be responsible for which costs, and if both parties will be obligated, the contract should show that.
Closing date and time
Most sellers justifiably want to close the deal within an even-handed period. Therefore, the contract should distinctly declare when the transaction is expected to be closed. It should also give the time of closing for specificity.
Deadlines for land survey
A land survey measures the land size and delineates (sketches out) property boundaries, typically to create a map of the land. Performing a land survey should be more of a necessity for buyers before closing the purchase. This is so as to identify any survey issues that might be present. It should be stated how many days before the closing date the buyer has to do so in order to give the seller ample time to take corrective measures or clarify. The number of days awarded to the seller to remedy any issues should also be indicated.
Due dates for property inspection
It is imperative that buyers review the property title before closing the purchase. Notable defects in the title and property should be noted through an inspection and be communicated to the seller through a notice. The number of days awarded to the buyer to notify the seller after receiving the title should be declared. This should then be followed by the number of days the seller has to remedy the issue after being issued a notice.
Property cures and maintenance
During the contract term, the property is bound to need maintenance or be improved to meet the required standards of sale. The land contract should outline who is responsible for such activities. Before closing, the buyer is advised to make independent inspections to confirm if indeed the property meets their expectations. It should be stated in the contract exactly when these inspections should be conducted and ceased. The date, month, year, and time should be indicated. During inspection, contractors or qualified professionals should be used to give a more definitive assessment. The contract should also state the deadline for notifying the seller of any defects or issues identified. Additionally, a date after a notification has been issued to the seller should be provided by which both parties should have reached an agreement regarding the issues.
The purchase price will sometimes depend on the property’s appraisal, and other times it does not. Whichever the case, declare it at this point in the contract. If the appraised value is to be considered, that means there is room for negotiation. Indicate how many days after the appraisal report that the parties have to reach an agreeable price.
Earnest money return
Sometimes the purchase can fail to go through, forcing a termination of the land contract, which will sometimes mean the earnest money is to be refunded. To accommodate such incidences, declare how many days after the termination of the contract the seller has to disburse money to the buyer.
Land contracts are governed by state laws, and as a result, it is imperative to declare under which jurisdiction the particular contract falls. This is simply achieved by indicating the state in which the property is located.
Purchase of property is customarily time-sensitive due to the appreciation of property value with time and such. The deadline set for signing and submission of the contract should be clearly stated in the format of date, month, year, and time.
Property purchases will often require certain disclosures, such as the lead-based paint disclosure according to law. These disclosures can be state-specific or general. The contract should state if there are any disclosures or addendums or not. If there are any, they should be named and listed in this section.
Additional terms and conditions
There might be additional terms not discussed in the contract when it comes to purchasing property but important to either party or required by state law. For example, most states allow sellers to sell property “as is” without providing warranties. This disclaimer can be included as an additional term. If there any, they should be outlined.
It is important to show that both parties read and reviewed the contents of the land contract. This is done by having each party write their initials at the bottom of every page. The initials should be written before the document is signed. Alternatively, an integration clause is included as proof that what is in the contract is what was agreed on. It should be made clear that any adjustments should be done in writing and signed by both parties.
A land contract must be signed in the presence of a notary public if the document is to be legally binding. The notary public should provide their signature, date of signing, name, and state or county they represent.
A signature block should be created with space for all involved parties. It should also have space to indicate the date when the contract was signed. A space for the agent’s signature should be provided, for it is recommended that an attorney reviews the contract before signing.
- Land seller’s sign – The seller’s signature should appear first, then the date of signing, followed by their name.
- Land purchaser’s sign –The buyer’s signature should appear next, then the date when they signed and their name.
- Agent’s sign – The agent’s signature should then follow, then the date of signing and their name.
With all the components necessary in a land contract discussed above, it is recommended that the given format be used when creating a land contract. Remember, before selling property already under the mortgage, seek consent from the lender first. States will have the maximum permitted interest rate; therefore, the seller should ensure their set rate does not exceed the state’s threshold.
Free Land Contract Templates
Types of Financing
As earlier mentioned, there are several options available to choose from for buyers to obtain financing for property purchase.
We shall look into these types to further clarify what they entail.
Seller financing is usually a quick way to attract buyers to purchase a property. Seller financing basically means the seller allows the buyer to purchase the property without raising the full amount at once but rather having them pay the purchase price in installments at an agreed interest rate. It is common for these payments to be made monthly for a period of 3-5 years. Seller financing has been observed to be more convenient than traditional lender financing. Buyers can opt for seller financing under the following circumstances.
- In situations when the buyer does not have enough money to cover the down payment required for qualification of a traditional bank loan or mortgage.
- In the event that the buyer does not qualify for a traditional mortgage due to reasons genuine reasons.
- If the property of interest does not fall under a category that traditional lenders typically finance.
- In cases where they are the only interested buyer in property that has been in the market for too long.
Traditional lenders such as banks can also choose to finance the purchase of unimproved property through a land contract. However, this funding/loan is given at higher interest rates and shorter payment periods. Another downside of such financing is that the loan will usually come with a balloon payment requirement after a series of periodic payments have been made. This ends up forcing the buyer to seek other loans to cover this balloon payment once the land has been improved and has a higher collateral value.
Purchase default is a provision made in an effort to discourage defaulting of buyers. It allows the seller to notify the buyer of any missed payment and impose a penalty on late payments while awarding the buyer a grace period to cover the missed payment. Should the buyer persistently fail to pay, a purchase default allows them to have a short period within which they are expected to pay the balance in full and vacate the premises as directed by the land contract. However, if they pay the missed payments on time, the buyer can choose to reinstate the initial contract if it is still feasible for them.
Acceleration clauses in underlying loans
An acceleration clause is a provision in a contract that makes all obligations to be performed under the contract due immediately upon a specific occurrence, such as a breach. In a land contract, it applies if the seller has a pre-existing mortgage on the property they intend to sell, and under the mortgage’s term, the sale of property or transfer of title is taken as default. Defaulting triggers an acceleration clause that dictates that any balance remaining becomes due and payable with immediate effect. Thus, the need to countercheck if such a clause exists for property owned through a mortgage.
Rights and Responsibilities of Buyer and Seller
A land contract awards its users (buyer and seller) certain rights and assigns them different contractual obligations imperative for the purchase to go through smoothly.
We shall look into these rights and responsibilities below.
Some of the legal rights awarded to the buyer include;
- Right of possession – The buyer has the right to occupy the property and claim ownership of the same through an equitable title.
- Right of control – The buyer has the right to utilize the property as they see fit as long as it is permitted by local laws.
- Right of exclusion – Buyers can choose who they want to prohibit from accessing or utilizing the property. However, if there is an easement clause that permits other people, say neighbours, to have access to certain areas such as walkways, the buyer should respect the clause.
- Right of enjoyment – The buyer is entitled to undertake any pleasurable activities of their choosing on the property if it helps them enjoy the property.
- Right of dispassion – Buyers enjoy the right to transfer ownership of the property to another party either temporarily or permanently through any of the following ways; selling, leasing, or gifting.
Some of the legal rights possessed by the seller include;
- Right of possession of legal title – Through a land contract, the seller is legally permitted to retain the property’s legal title, that is, until the buyer makes full payment.
- Right to a separate mortgage – The seller can obtain a second mortgage on the property. They are obligated to make payments to the lender just as the buyer is obligated to pay them. The buyer makes the specified payments to the seller, and the seller, in turn, pays the lender. This comes at the risk of foreclosure and losing all interests in the property to the seller should the buyer fail to make payment.
- Right to regain possession – In the event that the buyer breaches contract, in an effort to protect their interests, the seller is permitted to undertake certain courses of action such as termination of all buyer rights, retain all previously made payments as liquidated damages, and/or take possession of the property. Alternatively, they can demand full payment to be made immediately or take legal action to evict the buyer.
Before the complete transfer of ownership to the buyer, responsibilities to the property are distributed between the buyer and the seller in a land contract.
These responsibilities revolve around insurance and taxes.
- Insurance – The buyer is primarily responsible for providing adequate insurance on the property and liability insurance coverage. Each party is, however, responsible for insuring any personal belongings on the property during the term of contract.
- Property taxes – The buyer is primarily responsible for paying real estate taxes for the property. The seller can choose to bill the buyer at the end of the year or include the taxes when calculating the monthly payments.
As a means for consumer protection, the Consumer Financial Protection Bureau (CFPB) has been prompted to find ways how land contract sales can be done without violating the Truth in Lending Act (TILA). For example, in Texas, since 2015, the seller is obligated to transfer the property’s legal title to the buyer once the land contract has been recorded at the appropriate county office. However, they are entitled to impose a form of security charge (lien) upon the property to secure the payment of the remaining balance. The buyer, on the other, is obligated to honor the payment terms of the contract.
There are different things buyers and sellers are expected to carry out as best practices when executing a land contract. They are listed below.
|They should have the property appraised to confirm if they are getting value for their money.||They should conduct a credit check on potential buyers.|
|They should obtain title insurance.||They should ensure that both parties are included as insurance holders of the property.|
|They should employ a reputable title holding company to entrust with the executed deed and original paperwork of the purchase.||They should use a neutral third-party company to collect payments on their behalf.|
|The buyer should seek the services of an experienced property attorney.||They should consult an experienced property attorney.|
Pros and Cons
Land contracts have their fair share of merits and demerits. Mentioned below are some examples:
The pros of land contracts include the following;
- Land contracts are attractive to buyers and sellers in that, unlike traditional mortgages, land contracts when financed by the seller, offer more flexible terms, which is beneficial to the buyer and attracts more offers which is beneficial to the seller.
- Purchase of property through a land contract typically does not require a big down payment meaning it caters to a wider variety of buyers. Also, the buyer is allowed to take possession of the property once the contract has been finalized.
- Sellers are usually more lenient than banks or traditional lenders, making land contracts appealing to more buyers.
- Since the buyer is considered as the legal owner of the property they are buying, they can request interest and real estate tax deductions when filing their personal income taxes.
- Land contracts offer sellers relief in that missed payments are not to be a source of concern for the land contract allows them in such an event to terminate the contract and regain possession and keep all payments already made without going through judicial proceedings. Normally property reclamation can be done in a short period of 60 days.
- The sale of property through a land contract is a source of income in that periodic payment provides the seller with a steady income throughout the term of contract. Commonly interest rates in such a contract provide a higher return of investment than most ventures.
The cons of land contracts include the following;
- As a buyer, one is not protected under foreclosure laws, thus risking losing the property should they miss a payment, prompting the seller to regain possession of the property, a process that does not require legal proceedings.
- The buyer is responsible for the care and maintenance of property throughout the term of contract, which requires money.
- Land contracts allow sellers to cancel the contract should the buyer fail to make the balloon payment as specified regardless of whether they made all other periodic payments. This creates a huge risk on the buyer’s side.
- Since the seller is entitled to hold the legal title of the property during the term of contract, using a land contract to purchase property poses a risk of having the seller burden the property with other mortgages and liens.
- During the term of contract, the seller has to act as the property manager, meaning they have to assume more responsibilities like tracking and collecting payments, keep track of insurance, keep a record of and report taxes and interest for the IRS, and man the property as it is their investment after all.
- Sellers who have an underlying mortgage on the property and are depending on the periodic payments made by the buyer to cover the existing property mortgage, face a risk of losing their property should the buyer default on payment.
Frequently Asked Questions (FAQs)
Ownership of the property is acquired through a legal title which is transferred to the buyer once all the terms of the contract and payments are made. During the term of contract, the buyer has an equitable title, which goes far as to prevent the seller from trading the property to another person but does not give the buyer outright ownership of the same.
Yes. Land contracts are governed by state laws that differ from one state to the other, and thus the need to have a professional real estate attorney review the land contract to ensure it is compliant with all the state laws before it is signed.
Yes. Once signed and all the contractual obligations have been met, the land contract should be recorded with the appropriate county office to identify the buyer as the new owner of the property under the law. This should be the county where the property is located.
Yes. Buyers can resell property bought through a land contract. However, they are still obliged to the initial contract. They should follow the same process of obtaining a land contract with the new buyer.