Buy a Home With a Land Contract

A land contract is a way to purchase a house without getting a mortgage from a bank. Instead, the seller effectively becomes a lender and privately negotiates a payment schedule with the buyer. This can be a risky proposition, but it can also be very profitable, especially for the seller. For a buyer whose credit history has proven to be an obstacle to obtaining a traditional mortgage, a land contract can be the best way to get a home. However, the buyer should be confident of his or her ability to pay before entering into a land contract.

Steps

Understanding Land Contracts

  1. Learn about the concept. A land contract is when a homeowner agrees to sell a home directly to the buyer, with the terms for the deal set privately by the buyer and the seller. This allows for flexibility in setting up an agreeable payment schedule and permits the sale of homes to individuals with bad credit. Typically full payment is expected quicker than would be the case with a traditional mortgage, but the period of repayment is usually at least five years. The buyer lives in the house while he or she is completing payment on the property. However, payments may be based on a 15 year or longer payment schedule, with a balloon payment at end. This often requires the buyer to renegotiate with seller or find other financing.
    • Land contracts can be known by several other names, which vary in part by region. Synonyms include: Trust Deeds, Contract for Deed, Deeds of Trust, Home Notes, or Privately Held Mortgages.[1]
  2. Understand the risks of the seller. It is possible that you will not be able to pay for the house under the terms initially stipulated. In a sale conducted with a bank, the seller will obtain the full value of the property more or less immediately upon sale. The land contract, therefore, provides much less confidence about the security of repayment. However, if the buyer does not pay on schedule, the seller can terminate the deal, keeping the home and all payments.
    • There is the possibility that damage will be incurred to the property while the seller occupies it, but land contracts often make the buyer responsible for the upkeep of the home.
  3. Understand the risk of the buyer. These are much more serious than the risks of the seller. Once a land contract is signed the buyer will only be considered to have an “equitable title” not a full “legal title” to the house. If one misses payments they might lose title to the house and all of the money that they have paid for it.
    • While you will have flexibility in negotiating your payment schedule, you might still find the terms more difficult to meet than a traditional mortgage payment. The rate of repayment is much quicker and the interest rate higher. Most land contracts are also set up so that in the end you will need to pay a large lump sum payment, for which you might still need to take out a loan.

Brokering a Deal

  1. Find a real estate agent. The real estate agent will both find you a house and help you negotiate terms with a buyer. Because of that, it is important that the real estate agent realizes your situation and understands that you want to purchase a home through a land contract. You should disclose this fact at the beginning of your search.
  2. Find a home. It is important to find a house that you like, because once you have entered into a land contract you will probably find it difficult to extricate yourself from the deal without losing your investment. The listing does not need to indicate that the owner wants to finance the deal privately. It might, however, help to negotiate with someone who has had difficulty selling the house, possibly targeting properties that have been on the market for a few months.[2]
    • There is no readily available resource for finding sellers interested in a land contract. Usually you will be responsible for convincing a buyer to accept the deal. However, your realtor will know some buyers and might have some insight as to which would be interested in a land contract.
  3. Make a good offer. For a seller to take an interest in a land contract, you will need to offer good terms. Typically, houses sold via land contract sell for somewhat more than their normal rate. That means you will want to put in a higher offer than you otherwise would. You might want to offer the full listing price, possibly more, depending upon the local housing market.[1]
  4. Emphasize the advantages to the seller. Many sellers would prefer to receive the large lump sum payment they would get from a bank financed sale. Others might see a land contract as risky. However, selling your house with land contract can be a substantial financial investment. Emphasize these facts to the seller and you will be more likely to secure a cooperating partner in your purchase. Also, provide the seller with some confidence of your own personal reliability so that he or she is willing to invest in you.[3]
    • Houses sold on land contract typically go for a higher price than they otherwise would. Selling a house through a land contract is a good way to get back the full value of a house.
    • The seller effectively becomes an interest-earning lender. Typically the rate of interest on a land contract is very high, as much as 11%.
    • Because the seller does not get all of their money at one time, they can also spread out the payment of the taxes due from the sale over a period of years.
    • The seller obtains a regular flow of cash, without the pain of renting. Typically they will not be required to maintain the home in the same way that they would for a renter, but get the benefit of a steady stream of income.

Completing the Sale

  1. Have your agent write up an offer. This should include a minimum down payment, monthly payments, and interest rate. You will want to negotiate terms that you feel confident that you can pay, but also meet the seller’s demand to receive his or her money in a timely fashion. The flexibility in these deals is one of the principal advantages to buying with a land contract.
    • You should set up a contract that allows you to pay your debt ahead of schedule without any penalties. You should aim to spend as little time under contract as possible, because as long as you are under contract, there is the possibility that the deal with go awry and you will lose the house and your investment.[4]
    • Try to avoid including a balloon payment. A common feature of land contracts, they require you to close out the lending period, usually after a period of five to ten years, with a large lump sum payment of whatever is left on the loan. They ensure that the seller receives his or her payment in a timely fashion, ideally when the buyer will be in a better financial position to make such a large payment. Often you will need to take out a loan to cover a balloon payment. It is best to negotiate a deal that does not require a balloon payment as it can cost you your house if you are unable to meet the obligation. [2]
  2. Consult with a real estate lawyer. Because land contracts can be risky ventures you should confirm that all components of the offer are satisfactory. You will need to consider not only special stipulations put into the deal, but also state laws. A legal expert can verify for you that there are no hidden pitfalls in the deal.
    • Check state laws to confirm procedures for missed payments. In some states a single missed payment will invalidate the deal, so that the seller will be able to keep the property and your payments, which become, in essence, rent payments. Other states give the buyer a right to the home if they were up-to-date with a majority of their payments and paid the total sum owed by a specified time.[1]
    • Ask the lawyer for a title opinion. This is a comprehensive survey of all liens and mortgages on a property, including unpaid taxes, construction fees, or debts to a homeowners association.[5] If there is a lien or a mortgage on the house, your claim on it might be compromised even if you do make regular payments. [6]
  3. Sign the contract. You should take a couple of days to review the contract, preferably with the help of a lawyer. Then sign the deal. If any of the details of it seem disadvantageous, try to renegotiate a better deal. Consider not just the financial stipulations of the contract, but also details about the care of the house.
    • In addition to basic stipulations, like payment time, grace period, payment amount, the contract should have stipulations pertaining to the maintenance of the property, including who will be responsible for property taxes and homeowners insurance. Similarly the contract should indicate who will fix property damage, though this is almost always the responsibility of the buyer.[7]
  4. Maintain the house. Although you are effectively a renter until you have completed your payments, land contracts typically make the buyer responsible for upkeep of property. That means that if there are any broken appliances, mold problems, termites, or foundation issues, you will be responsible for them. Home inspections are rarely commissioned for land contract and you typically will not have the bargaining power to demand that the owner fix any household issues that might exist before signing the contract. Therefore, you should budget for home improvements.[2]
    • In some cases, the contract might stipulate that the house be kept in a certain type of condition to preserve the owner’s investment in the house.[1]
  5. Make regular payments. If you continue to pay on time for a period – usually five or ten years – you will eventually get full, legal title to the house. Try to pay down the debt faster than the contract requires so that you can free yourself of the interest payments and come into full ownership of the home as soon as possible.

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Sources and Citations

  1. ↑ 1.0 1.1 1.2 1.3 http://www.standardlegal.com/law-library/Land-Contract-Overview.html
  2. ↑ 2.0 2.1 2.2 https://www.trustedchoice.com/insurance-articles/home-family/buying-house-on-contract/
  3. ↑ http://miforeclosureresponse.org/wp-content/uploads/2012/09/Land-Contract-Guide-FINAL.pdf
  4. ↑ https://www.trustedchoice.com/insurance-articles/home-family/buying-house-on-contract/
  5. ↑ http://realtytimes.com/todaysheadlines1/item/20530-20000331_optitle
  6. ↑ http://www.standardlegal.com/law-library/Land-Contract-Overview.html
  7. ↑ http://miforeclosureresponse.org/wp-content/uploads/2012/09/Land-Contract-Guide-FINAL.pdf
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