A land contract, also known as a contract for deed, is an arrangement in which you finance the buyer's purchase yourself instead of having the buyer rely on a third-party lender. In addition, you keep legal title to the property until the buyer pays the final installment. Land contracts involve both advantages and disadvantages to sellers.
Because you are financing the purchase yourself, the buyer doesn't have to qualify for a loan in order to enter into a transaction with you. This allows you to attract buyers who would otherwise be unable to purchase your property. On the other hand, dealing with a buyer with poor credit history, or no credit history at all, is likely to increase the risk of buyer default.
Flexible Payment Terms
The lack of a third party to the transaction allows you considerable flexibility in negotiating terms with the buyer. You may, for example, refrain from demanding a down payment from a buyer with few financial resources. In exchange, you might demand a higher purchase price, or a large "balloon payment" as the final installment. In addition, since there is no third-party lender, interest paid by the buyer goes into your pocket, and you are free to negotiate interest rates with the buyer.
Third-party lenders demand extensive documentation, and their involvement in a real estate sales transaction inevitably results in significant delays. If you are in a hurry to complete a real estate transaction, a land contract can greatly expedite matters.
If the buyer defaults on payments, the seller must take legal action under procedures mandated by state law. In Michigan, for example, the seller must chose between forfeiture and foreclosure, notify the buyer of his choice, and file a lawsuit in a state court. Under forfeiture, the seller keeps all payments made to date and retakes possession of the property, and the buyer owes nothing. Under foreclosure, the buyer is treated as the "equitable" owner of the property, meaning that his previous payments under the contract entitle him to certain rights similar to those of a legal owner. The court orders a public auction of the property and uses the proceeds to pay the full amount due to the seller under the contract. Any surplus proceeds go to the buyer; the buyer is liable to the seller for any deficiency.
The SAFE Act
If you are selling real estate that is not your personal residence -- for example, if you are liquidating investment properties -- you may be required to obtain a mortgage loan originator license before signing a land contract. The federal Secure and Fair Enforcement Mortgage Licensing Act of 2008 -- the SAFE Act -- requires real estate mortgage loan originators to submit to an FBI background check, take a 20-hour education course, pass an examination, and list in a national database. SAFE licensing requirements contain exceptions--for example, they do not apply if you are selling your own home, if you are selling a commercial building, or if you are selling to an immediate relative.
- University of Minnesota Extension: Mortgages and Contracts for Deed
- Realty Times: Land Contract Pros And Cons
- Legal Services of Northern Michigan: Land Contract Information
- Ask Matt Online: Most Land Contracts Are Now Dead in Indiana
- Steve Sowell, Attorney at Law: Land Contract Forfeiture vs. Foreclosure
- The Free Dictionary: Equitable Title
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