New Hope for Home Ownership Through Land Contracts
In some places in the U.S., land contracts are common. Land contracts, a form of seller financing, are written legal agreements used to purchase real estate. These agreements work similar to a standard mortgage, but rather than borrowing money from a bank or lender to buy the property, the buyer makes payments to the current owner (seller) until the full purchase price is paid.
With a land contract, both the buyer and seller sign the agreement which covers the terms and conditions of the sale. Upon the satisfaction of all contractual terms, the legal title of the property transfers from seller buyer. This arrangement also protect both the buyer and seller during the process by creating what is know as an “equitable title” meaning that the seller can’t sell the property to someone else or have any liens placed on the property, but the buyer will not have the full “legal title” until all contractual obligations are met. These agreements can be advantageous for both the buyer and the seller in ways that traditional financing is not.
One of the biggest advantages of using a land contract is that it allows the eventual purchase for buyers who may not be able to obtain standard financing due to credit history or other reasons. Instead of paying a mortgage company each month, the buyer pays the seller directly. For sellers, this can be advantageous as they can typically raise the overall purchase price on the property due to the land contract arrangement. Also, in the event that a buyer doesn’t make payments (defaults) on the land contract, the seller is entitled to keep any payments made by the buyer, the property itself, and they’re free to sell the property to someone else. In tight real estate markets where there aren’t a lot of buyers, sellers can offer these land contract arrangements as a bargaining tool to entice more buyers to their property.
Land contract arrangements don’t come without disadvantages. Buyers can find themselves paying a higher overall purchase price than the value of the property, sometimes higher than would be with the interest from a traditional lending source, and can be left with a worthless “equitable title” in the event the seller defaults on the mortgage of the property and is foreclosed on. Sellers can be put off by these arrangements as they do not receive a lump sum payment as would happen with a cash or traditionally financed sale which can restrict their ability to re-invest the money from the property sale.
The rules and legalities involved in land contracts vary from state to state and as with most things in the real estate world, nearly everything is negotiable. These arrangements can be mutually beneficial, but it is important to have any agreements reviewed by a trusted legal professional before they are signed.
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