How does a Land Contract Work?

A land contract operates as a special type of arrangement between a seller and a buyer for the sale of real property, such as a house or commercial lot. In general, a land contract works by having a seller provide the capital for funding the loan on the property. The buyer is then responsible for paying monthly installments to the seller until the balance on the loan is paid off. Land contracts can be used to purchase residential homes or commercial properties. A land contract may also be referred to as a contract for deed, deed of trust, privately held mortgage, or installment land contract.

One of the key characteristics of a land contract is ownership. In a typical land agreement, the seller retains the title to the land so long as a balance remains on the loan. The buyer then makes installment payments in accordance with a mutually agreed-upon payment schedule. Once the buyer has completely paid off the principal on the loan, the seller gives the buyer the deed to the property.

Even though a buyer does not have the deed to the property until the principal is paid off, the buyer usually has the right to take possession of the property and use it. If the buyer wishes to pay the principal off faster, he or she can make lump sum payments to the seller. The seller, rather than a bank or other financial lending institution, typically provides the financing for the loan. A land contract is customarily created through a written agreement signed by both the seller and the buyer. Typically, these agreements spell out the purchase price of the property as well as the contract repayment terms like the payment amount, schedule, and interest rate.

Land contracts can provide a number of advantages for potential buyers. With most land agreement deals, a buyer does not have to give the seller a large down payment. Additionally, because the seller finances the transaction, buyers with less-than-perfect credit scores may be eligible for a land contract arrangement.

Some disadvantages can be associated with land contracts. Frequently, property sold through a land contract deal is more expensive than property purchased through a traditional lending scheme. Since the seller is financing the deal and the buyer typically does not have to offer a large down payment, the seller can sell the property at a higher price.

One of the biggest disadvantages to land contracts is payment default. If the buyer defaults on his or her monthly payments, the seller can reclaim the property. In this case, the seller is usually entitled to retain any installment money already paid by the buyer as rent.