Land contracts are owner-financed sales of real estate. The seller agrees to accept installment payments, so the buyer does not have to come up with cash for the full purchase price at closing.
Land contracts were popular in the 1970s and early 1980s because owner-lenders typically offered better rates and with less rigid terms than financial institutions. But they dwindled in popularity when mortgage rates and lending qualifications dropped significantly over the past 10 years.
Land contracts are becoming increasingly popular these days, now that banks and mortgage brokers are tightening their lending standards. They allow people with less than stellar credit to purchase real estate with individual payment terms.
Today, even though mortgage rates are still low, qualifying for an institutional loan has become very difficult. This makes land contracts an attractive alternative for many buyers.
What is a Land Contract? It is a legal agreement between a seller and a buyer. The seller agrees to sell a piece of land or a house to a buyer and to accept installment payments over time.
During the term of the land contract, the seller retains legal title to the property, while the buyer is granted an equitable title. Once the property is paid in full, the seller gives the buyer the deed to the property and the sale is complete. Now the buyer is the legal owner of the property.
It is possible to sell a property that still has a mortgage. In that case, the seller will continue to make the mortgage payments. As long as the buyers payments are higher than the monthly mortgage the seller will have a monthly profit.
Properties that are free and clear, that is, properties that no longer have any mortgage or other lien recorded against the title, offer the best buying opportunities. Sellers can be very flexible, and sometimes accept a lower interest rate or extend payments over a longer term.
Land contracts offer benefits to each party. To the buyer, there are no qualifying restrictions. Although the seller may ask for a copy of the buyer’s credit report, the seller may accept a buyer with poor credit, as long as he is confident that the buyer will make timely payments. It is possible to purchase a property via land contract with little or no money down; all terms of a land contract are negotiable.
Additional benefits to the buyer include very low closing costs, no points need to be paid to a bank, a quick closing (usually within seven days), and the buyer may be able to deduct the interest from their income tax.
For the seller, the benefits are also significant. The seller retains legal ownership of the property until the final payment is made. If the buyer defaults on the terms, the seller has the right to take possession of the property without a full foreclosure. Because land contracts make home ownership possible for people who otherwise have difficulty obtaining a loan, the seller can get a higher sales price for their property. The closing is fast and the costs are low, and the seller is assured a monthly income.
There are also potential tax benefits for the seller in terms of capital gains, since the sale is over time, rather than outright.
It is always a good idea to talk to a professional real estate agent, your accountant or attorney who is knowledgeable about land contracts.
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