What Are Real Estate Land Contracts?
A Real Estate Land Contracts — also called Land Contracts, Contracts for Deed, or Contracts for Sale — are purchase agreements between a buyer and a seller for a piece of real estate, and include specific loan and payment terms. The real estate can be any type of property, including undeveloped land.
Land Contracts Are Different from Mortgages
With a mortgage, ownership of the property is transferred to the buyer immediately on sale, before any loan payments are made. With a mortgage, the seller (or lender, depending on the source of the loan) gets a lien against the property, giving them the legal right to reclaim the property if the buyer doesn’t make the loan payments as agreed. With land contracts, ownership of the property is transferred only after the buyer makes all the loan payments.
With land contracts, the buyer’s legal rights are different than if they had a mortgage. With a traditional mortgage, the buyer is protected by state and Federal foreclosure laws. Land contracts are not covered under these laws. For example, with a land contract, the seller has the legal right to evict the buyer immediately, without needing to go through the foreclosure process.
Land Contracts with Seller Financing
Seller financing is often used with land contracts. These types of land contracts are sometimes called Installment Sale Land Contract. Seller financing lets the buyer purchase the property with very little upfront cash. Instead, the buyer makes payments to the seller based on the terms of the contract. The seller holds the title on the property until full payment is made, at which time ownership is transferred to the buyer.
Seller financing can also be used with mortgages. With a seller financed mortgage, The seller gives up ownership of the property immediately on sale. Instead of ownership, the seller has a lien against the property, giving them the legal right to reclaim the property if the buyer does not pay the mortgage payments.
Land Contracts with Bank Financing
Sometimes, buyers will use a land contract with bank financing. This usually happens with undeveloped land, where the buyer wants to make improvements. The bank loan will usually have a higher interest rate, a shorter term, and often has a balloon payment instead of regular monthly payments. Most land contracts with bank financing get refinanced into a more conventional loan once the land is developed.
Land Contracts with a Third-Party Trustee
Some land contracts will include provisions for the creation of a trust managed by a trustee. This is sometimes called Power of Sale. Title to the property is held in the name of the trust until both the buyer and the seller fulfil their obligations of the contract. Title is then transferred to the buyer. In the event that the buyer stops making payments, the trustee has the power to foreclose.
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