A land contract is a legal document that finances and transfers real property from one person to another at the same time. In a typical real estate transaction, the Buyer takes out a mortgage from a bank, and the Buyer pays the Seller in full at closing. The Seller then transfers the property to the Buyer, subject to the bank’s mortgage. After closing, the Seller has no remaining interest in the property, and the Buyer has full ‘equitable’ and ‘legal’ title to the property.
In a land contract transaction, however, there is no bank and there is no mortgage. The Seller essentially serves as the bank and finances the transaction by receiving regular payments (usually monthly) with interest from the Buyer. The Buyer does not receive ‘legal’ title to the property until the contract is paid in full and all other requirements of the land contract have been fulfilled. At that time, the Buyer receives a deed to the property from the Seller. Until the terms of the land contract are fulfilled at which time the Buyer receives a deed to the property, however, the Buyer does not have ‘legal title’ to the property. The Buyer does have ‘equitable’ title to the property, which means the Buyer can use the property as if it were his.
This type of transaction is much easier to complete – all you needs is an attorney to draft the land contract, and from there, the Buyer and Seller simply need to execute it, the Seller turns over possession of the property to the Buyer, and start collecting payments from the Buyer. There are (usually) no real estate agents involved, thus cutting out commission fees, and there is no bank involved, which allows the Seller to earn interest on the payments that the bank would otherwise make.
There are a number of reasons why one would use a land contract rather than a traditional real estate purchase contract and mortgage, including a buyer with poor credit or without enough money for a down payment on a mortgage, an sale from one family member to another, to secure a property in a longer than normal option contract, or to create essentially an annuity for the Seller for things such as retirement.
While there are many available form land contracts on the internet, each and every person seeking to enter into a land contract should do so with the advice of a trusted attorney. Attorneys do cost money, and as a result, most people prefer to avoid them and enter into a land contract based on a simple form. This may work for some in situations where everything goes to plan and there are no hiccups in the process. Everything going according to plan, however, is rare, and when dealing with assets often above and beyond $100,000.00, you shouldn’t roll the dice. If you would like additional information on land contracts, stay tuned to our blog or feel free to call us at 248.406.0620.