A â€œcontract for deedâ€ or an â€œinstallment sale agreementâ€, is a contract between the owner of a property and a person who wants to buy the property for an agreed-upon purchase price, whereby the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically paid in periodic installments, many times with a balloon payment to make the length of payments shorter than a fully amortized loan. When the full purchase price has been paid, the seller is obligated to deliver legal title to the property to the buyer. The legal status of land contracts varies from region to region.
It is common for the installment payments of the purchase price to be similar to mortgage payments in amount and effect. The amount is often determined according to a mortgage amortization schedule. In effect, each installment payment is partially payment of the purchase price and partially payment of interest on the unpaid purchase price. This is similar to mortgage payments which are part repayment of the principal amount of the mortgage loan and part interest. However, since land contracts can easily be written or modified by any seller or buyer; one may come across any variety of repayment plans. Interest only, negative amortizations, short balloons, extremely long amortizations just to name a few. Typical land contracts are easy to understand and usually only make up 3-5 pages. It is not uncommon for land contracts to go unrecorded. For several reasons the buyer or seller may decide that the contract is not to be recorded in the register of deeds. This does not make the contract invalid, but it does increase exposure to undesirable side effects.
Although land contracts can be used for a variety of reasons, their most common use is as a form of short-term seller financing. Usually, but not always, the date on which the full amount of the purchase price is due will be years sooner than when the purchase price would be paid in full according to the amortization schedule. This results in the final payment being a large balloon payment. Since the amount of the final payment is so large, the buyer may obtain a conventional mortgage loan from a bank to make the final payment. Land contracts are sometimes used by buyers who do not qualify for conventional mortgage loans offered by traditional lending institutional, for reasons of poor credit or an insufficient down payment. Land contracts are also used when the seller is anxious to sell and the buyer is not given enough time to arrange for conventional financing.
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