What IS a land contract?

A land contract is when a buyer has contractually agreed to obtain legal title to a property by paying the purchase price plus interest in installments. The seller is agreeing to transfer the legal title to the purchases upon the buyer’s full payment of the purchase price, plus interest.

A land contract goes by a few names: contract for deed, installment land contract, or a conditional sales contract.

During a land contract the buyer, also called the vendee, pays the agreed upon payments and the taxes; as well as maintaining the insurance and upkeep of the property during the life of the contract.

Once the final payment is made the seller, also called the vendor, transfers the title to the vendee.

What are the benefits of a land contract?

Seller Side

  • The Seller remains in possession of the property deed until the final payment of the contract is fulfilled.
  • No bank or third-party financer
  • Simpler transaction terms
  • Fewer time to settle disputes, banks can take up to 90 days to resolve a dispute or foreclosure. A vendor and vendee can settle their issues almost immediately depending on the relationship between the two parties.
  • The Seller has a steady flow of income during the payment period.
  • The Seller has the most control over the contract, meaning they can impose additional terms in the writing of the land contract.
  • If the buyer fails to make payments the seller can evict them. The seller retains the property deed and may do with it as they please, including sell it again.

Buyer Side

  • Simpler transaction, you don’t need to get approved for a mortgage loan or other financing.
  • You deal directly with the owner of the property instead of a property management company or a bank.
  • Depending on the terms agreed upon with the seller, you may be able to create a payment plan that fits your budget.
  • You may get a lower interest rate if the market currently has high rates.

What are the risks and downsides of a land contract?

Seller Downsides

  • You are responsible for determining the buyer’s creditworthiness, establishing the down payment, terms and interest rates.
  • Contract mistakes. As the writer of the contract, you must cover many issues and situations that can easily be overlooked.
  • Wear and Tear. While the buyer is making payments, they may decide to live in the property. Meaning that they can damage the property. If the buyer decides to opt out of buying the property, or gets evicted, you are responsible for taking care of the damages left behind.
  • Any changes the buyer makes to the home (example, remodeling the kitchen), to suit their lifestyle, are left behind if they opt out of buying or are evicted.
  • Since you possess the property deed and title, it may be determined by a government inspection that you are responsible for the property maintenance.
  • In Michigan, it’s been ruled that the seller may not sue the buyer for additional damages outside of the recovery of the property.

Buyer Downsides

  • You are dependent on the seller. Should the seller miss their mortgage payment, and be foreclosed on, the buyer may be left with no property and a useless contract.
  • Contract mistakes. Though you are not responsible for writing the contract, you are responsible for agreeing to the contract. You are responsible for examining the contract prior to agreeing and understand all the terms.
  • If interest rates for mortgages are low, the rates a seller may offer you could be higher than a mortgage. Meaning you may be grossly overpaying for the value of the home.
  • You are responsible for determining the value of the home before you buy. If you don’t have the experience or knowledge of the local market you could be overpaying for the property.
  • The risks on the seller make finding sellers willing to use a land contract, to sell their property, difficult.

So, why are land contracts so hard to find?

At the time of writing this (July 19, 2019), there are banks and financers offering low interest rates for mortgages. This gives buyers better terms than a seller might be able to write into a land contract. Additionally, move in ready properties sell fast enough that sellers don’t need to take the risks that come with a land contract.

All these things make land contracts less appealing to sellers because they can save money and the risks don’t outweigh the benefits.

TLDR

In today’s market homes are selling quickly enough to not need to resort to a land contract to sell.