Finance Definitions: Land Contract

Finance Definitions: Land Contract

As we continue to define finance terms here at MomVesting, we now come to the term "Land Contract." This term refers to a real estate contract that allows a buyer to purchase directly from the seller rather than through a bank. Sound familiar? Yes, land contract is similar to a rent-to-own agreement...but it is also very different. Let's take a look at everything that goes into the land contract.

What is a Land Contract?

A land contract is, quite simply, a contract between a buyer and seller to transfer property to the seller after all the payments are made. In essence, the seller serves as the bank in this transaction, which can be appealing to a buyer who cannot obtain a traditional mortgage. However, land contracts are often set up at a much higher APR than traditional mortgages.

Going deeper into the land contract details, we can further define the land contract. For one thing, land contracts can include anything from land to a house to a commercial building. Additionally, the financial details in land contracts can vary, but it often follows traditional ARM mortgage details: a down payment is usually collected, monthly payments are made, and a balloon payment is often due after a certain period of time.

Land Contract vs. Rent-to-Own

While it may be tempting to compare a land contract to a rent-to-own agreement, there are quite a few differences. First, the land contract does not have a rental portion built into the payment. All of the payment (minus the interest portion) goes directly toward reducing the principal.

Next, while rent-to-own agreements are typically drawn up through an attorney and filed through the county's recorder's office, a land contract is not always recorded. This leaves the buyer at risk should the seller not keep up his end of the deal (ie: paying taxes, paying any existing mortgage, and ensuring the title is clean): if the seller makes any of these mistakes, the buyer could be out a lot of cash, without a home to show for it.

Protecting Yourself in a Land Contract

Despite the dangers that exist in a land contract, sometimes the deal can be a good option for a buyer, especially when obtaining a traditional mortgage is impossible. To make sure you're covered in a land contract, though, doing a few things can help:

  • Get a Lawyer: First, drawing up a contract through an attorney can help protect you. Also, once the contract is complete, recording the contract in the county's recorder's office will further protect you.
  • Have a Title Search Completed: The lawyer may suggest a title search while drawing up the contract, but if not, searching the property and seller through a title company can make you aware of any liens on the property. The attorney can look over the search and let you know of any dangers that exist in purchasing the property.
  • Check on the Current Bank's Policies: If the seller owes any money on the house to a bank, it can be difficult to work out details of a land contract. Most banks will not allow a land contract to exist on the same property, which leaves you as the buyer exposed to a failed contract...and lost money.

Overall, land contracts could potentially be helpful for those who wish to purchase a home through non-traditional means. However, making sure the contract is legitimate (and that you are not in danger of losing money), dealing with a real estate attorney can help protect you.

Photo Source