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A land contract is a legal agreement between a buyer and the owner. The buyer pays the seller or property owner until the total purchase price is complete; meanwhile, the seller will often finance the purchase. In addition to vacant parcels, land contracts cover houses, apartment buildings, commercial properties, and other real estate types.

Depending on your area's legal and real estate terminology, these deals may be called:

  • Land contracts
  • Contracts for deed
  • Installment land contracts
  • Real estate contracts
  • Bonds for title
  • Land sale contracts
  • Memorandums of contract

A land contract involves compromises between both parties. Instead of receiving full payment at closing, the seller gets overtime pay if the buyer pays all agreed installments. But without realizing it, many buyers may sacrifice the legal protections included with rental agreements or mortgages.

Historically, they have benefited sellers over buyers and have been used to discriminate. Yet, a land contract does not have to be a bad deal for buyers. If you're considering entering a land contract, keeping this context in mind is essential. Discover more below.

How Does a Land Contract Work?

For the buyer, a land contract is an alternative to a mortgage or cash purchase, allowing the owner to dispose of property that a bank might not finance. Additionally, it allows sellers to include those who may not qualify for traditional loans or government-backed mortgages in their potential.

Land contracts follow a different process than traditional home purchases. To get started, follow these steps:

  1. Find an owner-financed seller: First, identify a seller who offers owner-financing. Real estate agents, listing agents, and third-party services can help with this. For best results, look for land contract specialists.
  2. Land contract negotiations: Agree to the terms of a land contract before moving forward. Both buyers and sellers will work together to establish these terms. These terms will include the purchase price, interest rate, loan period, installment payment, and down payment.
  3. Land Assessment: It may include a survey and a Perc test. A Perc Test evaluates water drainage on the property to determine if it's suitable for septic use.
  4. Signing: When the contract for the deed is signed, you will pay the down payment (if one is required), and as the buyer, you will receive an equitable title. Make timely payments. Otherwise, you may forfeit your rights to the property.
  5. Contract Recording: Some states and the seller may require registration of contracts for deeds with the county after signing them.

What Does a Land Contract Cover?

The seller and the buyer will benefit from a comprehensive and transparent purchase agreement template which is a binding contract and should include the following items:

  • Sales price: Agree on the price
  • Down payment: An initial down payment ensures the buyer is vested in keeping the land contract. A down payment of 5 to 10 % of the property's value is acceptable when negotiating with the seller. Get a valid bill of sale from the seller to protect yourself in future disputes.
  • Payment terms: The contract needs to outline all these factors in advance. A promissory note template may be helpful here to summarize the key points of the agreement, including: Seller details, How much and how many installments will there be, Payment frequency, and Home insurance and property taxes
  • Interest rate: A seller entering such a contract faces higher risks than traditional financing methods, and poor credit histories make seller financing rates high for buyers.

In some states, land contracts are subject to interest rate limitations to prevent predatory lending practices. In Vermont, for example, land contracts are allowed to charge 18 percent interest, whereas, in Michigan, it is only allowed to charge 11 percent.

Rights and responsibilities: As a final point, a land contract must include rights and responsibilities for both parties. Both the buyer and seller benefit from a clear and complete contract.

Start your Purchase Agreement Template Now

How Are Land Contract Payments Calculated?

A monthly installment land purchase agreement consists of a principal amount and interest payment. The higher the interest rate, the bigger the seller's share of the monthly payment. The remaining monthly payments pay off the seller-financed loan principal.

Making sense of the numbers

To calculate the interest rate, multiply the principal balance by the interest rate. Divide by the number of payments made annually - usually 12 monthly installments. Based on these calculations, you will determine how much interest you owe the seller each month.

For example, a $150,000 loan with an 18 percent interest rate in Vermont has an initial payment of $2,250. *$150,000 .0.18 = $27,000. $27,000/12 = $2,250**

Following each payment, the principal balance reduces, reducing future interest payments. Your seller receives a smaller portion of your monthly installments. In most cases, the principal will be paid off several years later, between two and five years. Ensure you receive a proforma to document all payments made.

Pros and Cons of a Land Contract

Taking the proper steps to protect both parties legally can benefit both parties in a land contract. Land contracts, however, offer fewer consumer rights than traditional property. Consider these pros and cons before deciding.

Pros Cons
When a small-dollar mortgage isn't available, you can purchase a low-cost property. Depending on the state law where the buyer lives, it can be very time-consuming and expensive for the seller to foreclose on a non-paying buyer.
Since the terms are flexible, financing can be easier to obtain. It can be faster than getting a mortgage to buy a home. If a buyer cannot get traditional financing, they may not negotiate a favorable land contract, and buyers may not have substantial protections under state law.
Sellers may earn a high return on their investment. Buyers can pay much higher interest rates on land contracts than on conventional mortgages
Other closing costs (but recommended) are optional for the buyer, and no mortgage origination fee. Bankruptcy, death, delinquent taxes, or stopped mortgage payments could lead to the buyer losing the home. Until the contract is satisfied, they cannot use the land contract as collateral (such as a home equity loan).
You may refinance with a traditional mortgage upon improving your credit and saving up a down payment. Many reasons may prevent refinancing (poor property condition, buyer's credit, low home value, etc.)

When Does the Buyer Become the Owner of the Property?

The buyer becomes the owner once they fulfill the land contract. In the interim, you have a deed of trust or equitable title to live on-site or develop the property through a ground lease. Land contracts work like purchase option contracts because the down payment is non-refundable.

In any of these agreements, the buyer stands to lose money and property if they do not have enough cash or financing to complete the deal.

Helpful Resources:

Percolation Test Procedure - State of Virginia

What’s the Difference Between Legal Title and Equitable Title? -Courthouse Direct

How To Get A Small-Dollar Mortgage - Forbes

A land contract is a legal agreement between a buyer and the owner. The buyer pays the seller or property owner until the total purchase price is complete; meanwhile, the seller will often finance the purchase. In addition to vacant parcels, land contracts cover houses, apartment buildings, commercial properties, and other real estate types.

Depending on your area's legal and real estate terminology, these deals may be called:

  • Land contracts
  • Contracts for deed
  • Installment land contracts
  • Real estate contracts
  • Bonds for title
  • Land sale contracts
  • Memorandums of contract

A land contract involves compromises between both parties. Instead of receiving full payment at closing, the seller gets overtime pay if the buyer pays all agreed installments. But without realizing it, many buyers may sacrifice the legal protections included with rental agreements or mortgages.

Historically, they have benefited sellers over buyers and have been used to discriminate. Yet, a land contract does not have to be a bad deal for buyers. If you're considering entering a land contract, keeping this context in mind is essential. Discover more below.

How Does a Land Contract Work?

For the buyer, a land contract is an alternative to a mortgage or cash purchase, allowing the owner to dispose of property that a bank might not finance. Additionally, it allows sellers to include those who may not qualify for traditional loans or government-backed mortgages in their potential.

Land contracts follow a different process than traditional home purchases. To get started, follow these steps:

  1. Find an owner-financed seller: First, identify a seller who offers owner-financing. Real estate agents, listing agents, and third-party services can help with this. For best results, look for land contract specialists.
  2. Land contract negotiations: Agree to the terms of a land contract before moving forward. Both buyers and sellers will work together to establish these terms. These terms will include the purchase price, interest rate, loan period, installment payment, and down payment.
  3. Land Assessment: It may include a survey and a Perc test. A Perc Test evaluates water drainage on the property to determine if it's suitable for septic use.
  4. Signing: When the contract for the deed is signed, you will pay the down payment (if one is required), and as the buyer, you will receive an equitable title. Make timely payments. Otherwise, you may forfeit your rights to the property.
  5. Contract Recording: Some states and the seller may require registration of contracts for deeds with the county after signing them.

What Does a Land Contract Cover?

The seller and the buyer will benefit from a comprehensive and transparent purchase agreement template which is a binding contract and should include the following items:

  • Sales price: Agree on the price
  • Down payment: An initial down payment ensures the buyer is vested in keeping the land contract. A down payment of 5 to 10 % of the property's value is acceptable when negotiating with the seller. Get a valid bill of sale from the seller to protect yourself in future disputes.
  • Payment terms: The contract needs to outline all these factors in advance. A promissory note template may be helpful here to summarize the key points of the agreement, including: Seller details, How much and how many installments will there be, Payment frequency, and Home insurance and property taxes
  • Interest rate: A seller entering such a contract faces higher risks than traditional financing methods, and poor credit histories make seller financing rates high for buyers.

In some states, land contracts are subject to interest rate limitations to prevent predatory lending practices. In Vermont, for example, land contracts are allowed to charge 18 percent interest, whereas, in Michigan, it is only allowed to charge 11 percent.

Rights and responsibilities: As a final point, a land contract must include rights and responsibilities for both parties. Both the buyer and seller benefit from a clear and complete contract.

Start your Purchase Agreement Template Now

How Are Land Contract Payments Calculated?

A monthly installment land purchase agreement consists of a principal amount and interest payment. The higher the interest rate, the bigger the seller's share of the monthly payment. The remaining monthly payments pay off the seller-financed loan principal.

Making sense of the numbers

To calculate the interest rate, multiply the principal balance by the interest rate. Divide by the number of payments made annually - usually 12 monthly installments. Based on these calculations, you will determine how much interest you owe the seller each month.

For example, a $150,000 loan with an 18 percent interest rate in Vermont has an initial payment of $2,250. *$150,000 .0.18 = $27,000. $27,000/12 = $2,250**

Following each payment, the principal balance reduces, reducing future interest payments. Your seller receives a smaller portion of your monthly installments. In most cases, the principal will be paid off several years later, between two and five years. Ensure you receive a proforma to document all payments made.

Pros and Cons of a Land Contract

Taking the proper steps to protect both parties legally can benefit both parties in a land contract. Land contracts, however, offer fewer consumer rights than traditional property. Consider these pros and cons before deciding.

Pros Cons
When a small-dollar mortgage isn't available, you can purchase a low-cost property. Depending on the state law where the buyer lives, it can be very time-consuming and expensive for the seller to foreclose on a non-paying buyer.
Since the terms are flexible, financing can be easier to obtain. It can be faster than getting a mortgage to buy a home. If a buyer cannot get traditional financing, they may not negotiate a favorable land contract, and buyers may not have substantial protections under state law.
Sellers may earn a high return on their investment. Buyers can pay much higher interest rates on land contracts than on conventional mortgages
Other closing costs (but recommended) are optional for the buyer, and no mortgage origination fee. Bankruptcy, death, delinquent taxes, or stopped mortgage payments could lead to the buyer losing the home. Until the contract is satisfied, they cannot use the land contract as collateral (such as a home equity loan).
You may refinance with a traditional mortgage upon improving your credit and saving up a down payment. Many reasons may prevent refinancing (poor property condition, buyer's credit, low home value, etc.)

When Does the Buyer Become the Owner of the Property?

The buyer becomes the owner once they fulfill the land contract. In the interim, you have a deed of trust or equitable title to live on-site or develop the property through a ground lease. Land contracts work like purchase option contracts because the down payment is non-refundable.

In any of these agreements, the buyer stands to lose money and property if they do not have enough cash or financing to complete the deal.

Helpful Resources:

Percolation Test Procedure - State of Virginia

What’s the Difference Between Legal Title and Equitable Title? -Courthouse Direct

How To Get A Small-Dollar Mortgage - Forbes