A land contract mortgage allows the the buyer to borrow money for the purchase from the seller instead of using a bank. The buyer can take possession of the property and start renovations before paying the full purchase price. If you are the seller in a land contract transaction, you bear the risk of the borrower defaulting. Depending on your financial circumstances, it may be worth the risk to sell the property faster. Make sure the sale does not trigger the due-on-sale clause in your bank mortgage. If it does, you may be required to pay the entire remaining balance on the loan upon transfer of ownership.
Payment terms must be clearly detailed in the land contract. You have more flexibility in setting the down payment, interest and payment frequency when providing your own financing with a land contract than you would have by using a bank. You can negotiate with the buyer to find the most favorable terms. For example, you can increase the interest rate or add a balloon payment to make up for a buyer's inability to pay a large down payment at the beginning of the contract.
You can designate when the buyer takes possession of the property. The most common options are upon receipt of the down payment, after the contract is signed, or after the first monthly payment. Once possession is turned over to the buyer, you cannot enter the property unless specified in the contract, but you can insert terms into the contract that permit you to inspect the physical condition of the property after giving 24- to 48-hour notice.
You can foreclose on a land contract faster than a conventional mortgage. The easiest method is to set up an escrow account to collect the buyer's monthly payments. Send a quitclaim deed to the escrow agent with instructions to execute the deed when the buyer is late on his payments. The title returns to you and the buyer forfeits all the payments he has already made into the escrow account.
A land contract usually has a shorter term than a conventional mortgage. The payment schedule is based on a 15- to 30-year amortization, even though the term is shorter. There is usually a balloon payment at the end of the loan to make up the difference. You bear the risk that the buyer cannot make the balloon payment or obtain a bank loan to cover it. If he cannot, you can decide to foreclose on the property or modify the payment terms to give the buyer more time to pay.
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