What is a "Land Contract"?

If you have purchased a home in the past or made an offer to purchase a home, you have likely signed what is known as a “Purchase and Sale Contract”.  It is a relatively simply document that outlines the price, terms and conditions that is mutually agreeable to both the buyer and seller of real estate. 

After the process of property inspections, mortgage application, bank appraisal, there is a closing, at which time the deed and title is passed from the seller to the buyer. 

A land contract is lesser known – and used, and the likelihood is you have never heard of or seen one.  A land contract may look like a purchase and sale contract, yet, is entirely different. 

A land contract, simply stated, is a “rent to own” agreement between the seller of real estate and a buyer of real estate.  Essentially, the agreement outlines the purchase price, deposit, and other terms and conditions such as property inspections.  The land contract also outlines the term of the agreement, how much monthly rent the buyer will pay the seller and how much of the monthly rent will be applied toward the purchase price.  

There is a closing of the land contract, yet, at the closing, the deed remains in the seller’s name until the land contract reaches the full term.

Typically, the term of a land contract is for a period of years, perhaps three to five years.  At the time the land contract reaches its full term, another closing takes place where the buyer pays the seller the amount of money outstanding on the land contract (either by mortgaging the property or by cash), and the deed would then be passed from the seller to the buyer. 

You may wonder why anyone would use a land contract.  Typically, buyers of real estate who are unable to secure traditional mortgage financing consider land contracts to be their next best option.  Sellers of real estate, on the other hand, might favor a land contract in the circumstance that no other viable buyer has been identified. 

Land contracts have inherent risks for both sellers and buyers of real estate.  For sellers, the price agreed to in the land contract could be the value the market affords at a certain point in time.  However, the property might appreciate during the term of the land contract, and the seller would find themselves in a position of having to honor a contract that affords them less money.  That concern may be addressed within the land contract if it provides for market appreciation.  This may bring up the question as to whether the buyer may be able to financially afford a higher price for the property when the land contract reaches full term. 

Part of the risk for buyers is the market value of the home might decline during the term of the land contract and the purchase price has already been agreed upon in the land contract signed by the seller and buyer.

There is another significant risk to the buyer during the term of the land contract.  Because the deed remains in the name of the seller, the buyer is at risk for the investment and improvements made in the home.  For example, most people like to improve their property and make it “their home”.  That is natural and sounds reasonable.  Here is another “however”, the seller may have the potential of foreclosure actions against them for various reasons (such as non-payment of property taxes) or may financially encumber the property through a mortgage or a home equity line-of-credit (commonly referred to as a “HELOC”).   The buyer would then find themselves in unfortunate and precarious circumstances in a home they are emotionally and financially invested in.

In summary, land contracts are not necessarily a prudent option for would be homeowners.  The prospect and detriments of land contracts should be discussed with a competent real estate attorney or experienced real estate broker.

There is a tremendous amount of detail to be aware of when buying or selling a home.  If you have questions pertaining to the topic of real estate, please click the “contact me” button.  I will be in touch with you at my earliest opportunity.