Generally a Land Contract is used for a buyers of property that would not otherwise qualify for a mortgage, or by investor's who want to complete a purchase faster than going and getting a mortgage. It is a good way to utilize property ownership for someone who wants to own property, but may not qualify in the "conventional' way.
It is an agreement between a buyer and seller of property in which the buyer makes payments toward full ownership (as with a mortgage), but in a land contract, the title or deed is held by the "original" owner until the full payment is made. Many different types of payment formats can be used with a Land Contract; Cash, Trade, Propert Exchange, and anything else that the two parties agree too. Payments, Length of Contract and Interest Rates are fully negotiable between the two parties as well. Usually a down payment is required on the property but that can also be negotiated.
A Land Contract is similar to a mortgage, in the sense that there is an agreed upon price and payment schedule, but the payments are often not amortized evenly. Usually a large balloon payment may be required to complete the purchase. Land Contracts are also known as an installment purchase contract or an installment sale agreement.
A land contract can be thought of as a "lease with an option to buy". Certain states have more generous legal rights for land contract holders than others. A land contract buyer must be very careful to ensure that the terms of the contract are legally binding in case a dispute arises in the future. That is why I highly reccommend using a Realtor and/or a lawyer before you sign anything.
Lastly, if the purchaser does not make the payments in a timely fashion, the "original" owner can foreclose on the property, just like a lender can. So the original down payment and all of the payments would be lost.
I hope this gives you a basic idea of what a Land Contract is. Please let me know if you need a Realtor to represent you in case you are looking for a property.
There are over 20 ways to sell a home and around 15 ways to finance a home purchase. As lending requirements become tighter (Jan 2014) and more people are emerging from rental agreements as the outcome of a foreclosure or short sale, this alternative method will become increasingly utilized.
Often, this is a very valid option for those who are credit denied (self-emplyed, contingency based income, not W-2, investment income) but flush with cash.
As you have been cautioned, these arrangements can be predatory. If you are responding to a sign in the yard that says 'Rent to own" or "Lease Option" and there is no professionals involved...be very cautious.
However, if this is a solution that was created to solve an existing problem, there is reason to believe this can be mutially benefical.
DO NOT ENTER INTO THESE AGREEMENTS WITHOUT CONSULTATION,
A multi-dimensional real estate professional or attorney are your best resources.
CAUTION: in many, many, many, many, many instances, the owner is expecting you to default. That IS the business model for those who are predators. It can be a valid solution, but they are tricky and you must know what you are doing and able to fullfill your commitment. The many, many, many of which I refer typically exit these agreement much poorer than when they entered them.
Those believing this is a way to circumvent fixing their credit situation, seldom succeed.
Best of success,
Annette Lawrence, Broker/Associate
Remax Realtec Group
Palm Harbor, FL
Serious people call.
Really serious people require reliable, comprehensive data.
Instead of using bank financing, the buyer is basically using the seller as a bank.
Why would a seller do this? Well, usually because they can't get their price any other way.
Why would a buyer do this? Usually because they can't qualify for financing.
If you do qualify for financing, but this is such a special house that you really want to pursue it, then bring in an attorney to advise you on the deal.
One thing to look out for is that when a seller is doing the financing, they're much more eager to foreclose if you miss a payment than a bank is. Also, they're probably doing a land contract because they have an underlying mortgage, but an attorney will help you protect yourself in that situation. (If they owned it free-and-clear, they'd sell it to you on a note and deed-of-trust.)
All the best,
The deal involves a down payment by the buyer to the seller then monthly payments until the land contract "loan" is paid off. The interest rate on the land contract, price of home, monthly payment amount, length of loan and down payment are all negotiable between buyer and seller.
If the buyer stops making payments, then home would revert back to the seller, just like it would if a buyer stopped paying their monthly payment to a mortgage company.
When entering into a land contract, whether you are the buyer or seller, you should always have a lawyer look over the contract before signing.
When you're ready to buy, the best place to start is to hire an Exclusive Buyer Agent to represent you. EBAs represent home buyers only, and work to get you the best price and most favorable terms. You can go to NAEBA.org for a referral to an EBA in your area. Follow the link below.
I'm an EBA and I wrote a book called "Buying a Home: Don't Let Them Make a Monkey Out of You". It will be the best $6 you've ever spent.
Best of luck!