Land Contract
A land contract, also known as a contract for deed or an installment land contract, is a means of purchasing real estate in which the buyer makes payments directly to the seller rather than obtaining a traditional mortgage from a financial institution. Under this agreement, the seller retains the legal title to the property until the full or specified portion of the sales price is paid. The buyer gains equitable title, allowing them to use, occupy, and enjoy the property during the payment period.
Examples
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Basic Example: Collins purchases a recreational lot. Under the land contract she signed, she agrees to pay $500 down and $100 per month for 7 years. After fulfilling this payment schedule, she is entitled to receive a general warranty deed transferring ownership.
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Residential Property: Jane and Bill want to buy a house but are unable to secure a mortgage. They find a seller willing to use a land contract. They agree to a down payment of $1,000 and monthly payments of $800 for 15 years. Once they complete the payments, the seller will transfer the deed to them.
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Agricultural Land: A farmer enters into a land contract to expand his farm. He agrees to pay the seller $2,000 down and $500 monthly over ten years for the extra acres. During this time, the farmer can use the land for agricultural purposes.
Frequently Asked Questions
What are the benefits of a land contract?
- Land contracts can provide an avenue for purchasing property to buyers who may not qualify for traditional mortgages.
- The seller often benefits from earning interest income from the sale price over a period of time.
Are there risks involved with land contracts?
- There are significant risks for buyers, including the potential for forfeiture of the property and payments made if they default.
- Sellers assume risks such as the buyer’s inability to make payments, and they may need to evict buyers formally from the property if defaults occur.
How does a land contract differ from a mortgage?
- In a land contract, the seller retains the legal title until the sale price is fully paid, whereas, in a mortgage, the buyer receives the title upfront but provides the lender with a lien on the property.
Can a land contract be canceled?
- Yes, if the buyer defaults on the terms of the land contract, the seller may have the right to terminate the contract. The specific terms of cancellation are generally outlined in the contract.
Is the buyer building equity with each payment?
- Yes, as the buyer makes payments, they build equity in the property, even though they do not hold the deed until the terms of the contract are fulfilled.
Related Terms
- Installment Land Contract: Another term for a land contract, emphasizing the installment nature of the payment arrangement.
- Contract for Deed: A legal term for a land contract, mainly used in many jurisdictions.
- General Warranty Deed: A deed in which the seller guarantees that they hold clear title to a piece of real estate and have a right to sell it, offering additional safeguards to the buyer.
- Equitable Title: The right to obtain full ownership of property when specific contractual conditions are met, such as completing payment under a land contract.
- Legal Title: Actual ownership of the property, including the right to transfer ownership.
Online Resources
- NOLO: Land Contracts FAQ
- Investopedia: Land Contract Explained
- LegalMatch: Understanding Land Contracts
References
- Real Estate Law by Robert J. Aalberts
- Landlord’s Legal Kit for Dummies by Robert S. Griswold and Laurence Harmon
Suggested Books for Further Study
- “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
- “Real Estate Law” by Marianne Jennings
- “The Book on Managing Rental Properties” by Brandon Turner and Heather Turner
- “Making Money with Mobile Homes” by Lonnie Scruggs
- “Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold
