What Are Land Contracts? Examining The Basics

We've all seen the signs, For Sale By Owner. While lenders are still struggling to recover from the mortgage crisis, many sellers are using land contracts to sell their homes. Because every state varies somewhat on how a land contract works, it's best to speak to your accountant before entering into one. You don't necessarily need a Realtor, but often it's wise to have one involved.

The basis of a land contract is where the seller agrees to carry the loan on the property a buyer wants to purchase. There is usually a down payment required and equal monthly installments until one of two things happen, depending upon the land contract which we'll discuss in this article.

A seller is not a financial institution and therefore won't usually agree to enter into a thirty-year loan or land contract. In this case, a seller may offer to enter into a land contract with a buyer for a sum of years; most likely two to five years. At the end of those two to five years, the buyer is required to obtain a conventional mortgage where a one-time balloon payment is used to pay the seller in full. Or, if a buyer can afford to make larger monthly installments, the seller may agree to carry the loan for a period agreed upon until the home is paid in full.

During the period of the land contract, the seller retains the deed to the home and/or property until paid in full. If a buyer makes all the payments necessary to own the property outright at the end of the land contract, the property deed is then transferred to the buyer. If the buyer is required to obtain a conventional loan and has a balloon payment, the property deed will transfer to the bank or lender until the buyer pays the mortgage in full.

Land contracts are effective for both homes, land or a land and a house. Keep in mind that just because you see a sign that says, "For Sale By Owner," it doesn't always mean the seller is willing to enter into this type of real estate contract.

Some sellers will enforce an interest rate on a land contract, while others who have a strong need to sell their property won't require interest. The interest rate for a land contract is determined between the seller and buyer. There is no law that states land contracts must have a set interest rate. More than not, sellers who do want interest added in will use an interest rate that is similar to what lenders charge. If your land contract requires you to make a balloon payment and you must obtain a conventional mortgage, the interest rate agreed upon in the land contract may not be the same as the interest rate for the conventional mortgage you obtain.

During the term of any land contract, because the seller retains the deed to the property, the seller should pay the property taxes each year. Some sellers will add the annual property taxes into the purchase price so they have ample funds to pay for them when they are due. Other sellers will waive the property taxes and make these payments on their own.

Seek professional help before you sign any land contract. A Realtor, real estate attorney or accountant are your best bets to help you review a land contract. If you've been wondering, what are land contracts, and you're house hunting, this type of real estate purchase may be desirable and beneficial to both the buyer and the seller. If you feel confident enough to go it alone, visit DocStoc, free file sharing site where you can download a land contract template.

Photo Credit: MN Land for Sale by MN Homes for Sale