Land Contracts: A Beginner's Guide

To buy or sell a home, learn about this alternative to standard mortgage financing.

A land contract is a written legal contract or agreement that is used to buy real estate such as vacant land, a house, an apartment building, a commercial building, or other real property. A land contract is a type of seller-financed transaction. It's similar to a mortgage, however instead of borrowing money from a lender or bank to purchase real estate, the buyer pays the real estate owner, or seller, until the entire purchase price is paid

The land contract is signed by both the buyer and the seller and covers the agreed-upon terms and conditions of the sale. The legal title to the property goes from the seller to the buyer via a warranty deed or other deed used to convey title if all contract terms and conditions are met, including payment of the purchase price over a set time period.

This article covers the fundamentals of land contracts, such as how and when they're used to buy real estate.

Why Do People Use Land Contracts?

A land contract, like other types of seller financing, can benefit both the buyer and the seller.

Buyers' advantages There may be a buyer who is interested in the property for sale but is unable to acquire mortgage approval due to their credit history or other factors. The parties can agree on a sale by land contract in which the buyer pays the seller directly on a monthly basis.

Benefits for the seller. Although the seller does not receive the whole purchase price up front, as he or she would if the buyer took out a loan or paid cash, the seller may have more options for potential buyers. Also, by presenting a land contract, the seller may be able to negotiate a greater purchase price for the property. A hefty cash down payment may be required and received by the vendor.

When does the buyer of a land contract property become the new owner?

The buyer is regarded to hold "equitable title" to the property while making payments to the seller. The buyer has an equitable title to the land contract property, and the seller is prohibited from selling it to a third party or encumbering it with a lien or encumbrance that might interfere with the buyer's interest in the property.

Until the buyer pays the final payment, the seller retains "legal title" to the property. When the final payment is received and all of the terms of the land contract have been fulfilled, the deed to the property will be filed with the appropriate government office, such as the county register of deeds, naming the buyer as the new owner.

What Happens If the Buyer Doesn't Pay the Land Contract Payments When They're Due?

The seller can bring a court action called land contract forfeiture if the buyer defaults on the land contract or fails to make the required monthly payments to the seller. The buyer will "forfeit," or give up, all money paid to the seller for the property pursuant to the land contract, and the buyer's equitable title will be extinguished as a result of forfeiture. In other words, if the buyer does not pay, the seller keeps all of the money received as well as the property.

Because the seller does not receive the full purchase price at the time of sale when selling by land contract, the seller takes a risk, but a forfeiture right protects the seller from a buyer who does not pay, allowing the seller to keep payments and a typically large down payment made by the buyer while keeping the property to offer for sale to someone else.

Is it necessary to have an attorney review a land contract?

Buyers and sellers of real estate may find land contracts to be an excellent, or even the only, option. Because real estate laws differ by state, it is critical to consult with an experienced real estate attorney when drafting a land contract to ensure that relevant conditions are included and that the seller can enforce a forfeiture case if necessary.

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