Land contracts, or land sales contracts, are used when sellers finance buyers’ purchase of property. A land installment agreement, or land installment contract is a specific type of land contract where a seller agrees to provide financing for a buyer.
The seller asks for a specific purchase price and the buyer agrees to repay the loan in agreed-upon installments. The buyer pays the seller in installments and receives the deed to the property when all the payments are made instead of paying the whole cost of the purchase at closing.
This arrangement can be beneficial for buyers who are seeking to secure financing on short notice. For sellers, it may provide a bit of security that the payments will be made consistently.
It is common for land contracts to have short terms and involve lump sums, or balloon payments of the remaining balance when the buyer’s equity allows mortgage financing of the property. It is important to note that, depending on the laws of the state, a land contract agreement may be subject to constraints.
In most instances, land contract buyer rights provide that a buyer will receive equitable title to the property but not equity in the property. Usually, a buyer is permitted to move in immediately.
If a potential buyer does not have credit, a land contract is one method that can be used to enter into the real estate market without having to meet the standard mortgage requirements. If a seller has property that may be difficult to secure financing for or for whose target demographic of purchasers are not ready to seek a regular mortgage, a land contract may provide a way to attract potential buyers.
What Else Should I Know About Land Contracts?
It is important to note that land contracts have historically favored sellers. A buyer gives up some of the rights they would have with a regular mortgage or rental agreement when they enter into a private agreement.
Because a seller retains legal title until the buyer pays the entire amount, foreclosure and forfeiture are still possibilities that can be triggered by a single missing payment in certain situations. Any individual who is considering this type of contract should consult with an attorney for land contracts who is familiar with real estate sales before signing.
It is important to note that land installment agreements may also be called other names, such as:
What Are Common Terms in Land Installment Agreements?
Typically, a land installment contract may last from 5 to 10 years, include a balloon payment at the end, and have a higher interest rate than a standard mortgage. The terms of these types of agreements can vary widely because they are weakly controlled and their terms are not specifically regulated under the law, which means the terms are up to the buyers and sellers.
Buyers who successfully complete land contracts typically refinance after several years to a regular mortgage. This provides them with greater protections and lower interest rates.
What Happens with the Title in a Land Installment Agreement?
In contrast to other types of real estate sales, the title in a land installment agreement will not immediately transfer to a buyer. Instead, the seller will retain the title to the land or property.
The buyer, however, is permitted to assume physical possession of the property or land, often to reside there or to use the property for various purposes. A buyer can obtain legal title to the property once they pay off the full purchase price, in addition to interest.
What If I Have a Legal Dispute over a Land Installment Agreement?
Similar to other real estate agreements, land installment agreements may be associated with different types of legal issues, including:
- Breach of contract by either party;
- Real estate fraud issues, such as misrepresentation during negotiations;
- Failure to record the agreement in writing;
- Real estate contracts, in general, must be in writing;
- Issues with licensing or certification;
- Failure to keep up with payments; and
- Failure to deliver title after the buyer completes making their payments.
There may be several different remedies available for various violations. In the majority of cases, a monetary damages award may be sufficient.
In other cases, the court may order an equitable remedy instead of monetary damages, for example, re-writing the contract.
What Advantages Does a Land Sale Contract Offer a Buyer?
There are numerous pros and cons of land contracts for buyers. For buyers, a land contract may be the only financing that is available for them depending on:
This pros of a land contract purchase may include:
- Having a smaller down payment;
- Paying less in closing costs; and
- Having lower interest rates than mortgages.
It is important to note, however, that there may also be cons, such as fluctuating interest rates as well as having to pay a large balloon payment at the end of the contract period.
What Advantages Does a Land Sale Contract Offer a Seller?
There are also pros and cons of land contracts for sellers. For sellers, using a land contract may be the only way they are able to obtain financing and complete their purchase.
Land contracts also allow sellers to have a deferral of capital gains over the term of the land contract payments. It may be slightly easier to enforce a land contract than to enforce a mortgage.
It is important to note, however, that sellers assume the risk that they may have to retain their property and resell it at a later time. Using a land contract also means that a seller will not receive all of the sales proceeds at closing.
What Happens if a Land Contract Is Breached?
One of the most common issues that arises with a land contract is how to remedy an apparent breach of the terms of payment. Due to the fact that the majority of land contracts involve monthly payments, legal action may be required if the buyer misses one of their payments.
In many states, a buyer will be penalized and will be required to make up for the payments that they had missed. If it seems that the buyer will also not make good on their future payments either, it may indicate that the entire contract was breached.
In these types of cases, more serious measures may be taken, such as placing a lien on the breaching party’s property to compensate for their missed payments. In order to avoid any future issues, the parties may include a clause in the contract that outlines the legal penalties that will be implemented if the original land contract is breached.
It is important for an individual to consult with a land contract lawyer when they are drafting or reviewing the contract in order to ensure that all of the legal requirements are met and that all of the necessary clauses are included so that future conflicts can be avoided.
Do I Need a Lawyer for Help with Land Installment Agreements?
A land installment agreement can be a fairly complex type of real estate transaction. If you are considering entering into this type of agreement, it is essential to consult with a real estate lawyer.
Your lawyer can help you draft a contract, review a contract that has been drafted, and help during contract negotiations. In addition, if you have to file a lawsuit, your lawyer will represent you in court and ensure your interests are protected.