A land contract is a type of real estate contract. Similar to a mortgage, land contracts are used to purchase a property with a specific type of payment installment. It is a good choice for anyone who can’t secure a loan through a bank or other lenders. This is possible if the person’s credit situation or other qualifications can’t meet the lender’s condition. Therefore, making a land contract is a form of seller financing. A land contract certainly has its ups and downs. Before you jump into creating a land contract for your dream property, here is your written guide to Land contracts in 2022.
What is a Land Contract?
A land contract is a written legal contract or agreement. It is used to buy property. But to obtain a land contract, it has to be agreed upon by both parties, the seller and the buyer. Because of the document’s nature that’s considered a seller-financed purchase, the document needs to be legally binding. Both parties will sign a promissory note as a part of the property deal. To do this, the seller must be free to finance. Meaning they are not bound by a mortgage, or the seller’s mortgage lender allows it. Buyers need to confirm this before closing the deal.
A seller-financed purchase can be of use when there are too many conditions to meet before applying for credit. This gives both parties freedom to arrange the payment, terms, and conditions. It allows the buyer to buy directly from the property seller. It also helps the seller to sell faster. The number of people involved in this sale is also limited. The closing cost in a land sale contract purchase is typically lower, but this gives the seller the right to ask for a higher price for the property. There is no wait time in the land owner financing process for a bank loan, underwriting, and any other legal process.
Land contracts are usually held for about five to ten years. For some properties, it might carry higher interest rates compared to traditional mortgages. However, the regulations are loose and adjustable to the seller and buyer. Some buyers even refinance the house after a few years of obtaining the land contract to secure the property and lower the rates. Refinancing the house could also allow the owner to convert the land contract to a traditional mortgage.
How do Land Contracts Work?
A land contract is a real estate contract that works after the seller and buyer agree on a land contract. The buyer can then proceed to make a down payment and sign promissory notes to pay in installments. Keep in mind that the buyer doesn’t legally own the property title until the installment is fulfilled. A land contract is a contract for deed in which the buyer holds an equal title to live in the property or develop the property. The regulation of a land contract may differ between states. You are encouraged to work with property lawyers to review the deal.
Steps by step before buying a property with a land contract are:
1) Property owner agrees to sell and finance a property to a buyer
2) Property owner works with real estate lawyers to create a land contract deal
3) Both parties discuss the terms and conditions regarding the land contract
4) Property owner provides the buyer with a deed of trust
5) Buyer continues to pay the property in agreed installments
6) Property title owner hand over the title to the buyer after the installment is fulfilled
7) Both parties should retain documentation of the transaction
What to Expect from a Land Contract
Not every property seller offers a land contract. Oftentimes you need to propose the idea to the seller. Be honest to the seller about the reasons you can’t qualify for a mortgage, and offer a proposal that will benefit both of you instead of one party only. You also need to make sure that the seller is free to finance or that their mortgage lender allows them to do so. But a land contract isn’t too different from a mortgage, you could be subjected to a higher price because the seller is looking for a benefit or even a higher interest rate. Even higher than a mortgagee’s interest rate.
As a seller, however, a land contract could be a promising investment. There is a promissory note that you could sell to an investor or lender. It could give the seller the benefit of not spending less. However, a promissory note is only valued at 65% to 90% of the real value. You might want to include the notes that you allow seller-financed purchases when you are advertising your property. It could appeal to more buyers and therefore lead to a negotiation that will sell your property faster. But make sure you can finance the property with some tricks stated before.
How to Create a Land Contract Deal
Before you create a land contract agreement you should hire real estate lawyers or agents to review the written contract. Including sales contracts and promissory notes. You should also prepare other legal documents needed to settle the deal. It may vary in each state. Before creating a contract deal, you also have to agree on the land purchase agreement. Negotiate your asking price before moving on to the land purchase agreement.
You should also do some research about the property you are interested in. Complete a title search to make sure that the property belongs to the person you negotiate the prices with. It helps you settle a misunderstanding and therefore helps the title transfer process quicker. You might also want to use an escrow service. Placing the deed with a third party. This process is to ensure that all parties hold up to their end of the deal. You should also inspect the land contract homes you’re dealing with. Including structural elements and major systems in the house. Such as roof damage, plumbing, asbestos, mold, pest problems or damage, and others.
Afterward, you can sign the land contract and move into the house. Take note that the property title isn’t legally yours until the installments are fulfilled. But you are subjected to an equal title or the right to occupy the land stated in the contract.
What’s Included in a Land Contract
A land contract should include this information:
- Name and address of all parties
- Property description (area, number of rooms, year built)
- Property owner acknowledgment
- Land contract limitations
- Easements on the property
- Payment installment
- Interest rates and late fees
- Start and end date of the contract
- Payment schedule
- Insurance terms and conditions, including warranties and guarantees
- State-specific clauses and terms
- All parties’ signature and dateline (the legally binding elements)
Land Contract Recording Process
You might be wondering, does a land contract have to be recorded? The answer is yes. After both parties sign the contract, it can be documented by each party. Then you need to take it to the notary office and get a notary seal. The signing process could be subject to a witness according to the state the deal is made. After getting the notary seal, you could take the documents to the county recording office and register them. You might need to pay a fee for the recording process. The amount of the fee is determined by the county office in each state.
Installment Land Contract
A land contract installment is a written agreement to buy the land over time. The title transfer won’t happen until these installments are fulfilled. It should state all terms and conditions of the agreement between both parties, the seller and buyer. You need to be certain of the seller’s mortgage status since a land contract is a seller-financed purchase. The problems with mortgage status could cost you the property title, and if you are already living on the property, you could face legal eviction.
This case can be used for a buyer who has a poor credit score or isn’t qualified for traditional lending. It is also used by a seller that wants to sell a property quickly. It is also offered as a payment method if the land is undeveloped or undesirable. Practically, a land contract can be paid through a lump sum or even monthly installments with interest. To give protection to the buyers, the land contract can be paid monthly. It includes taxes, insurance, maintenance, and even repairs. The buyers could compare this to available properties around the area to determine whether or not the amount paid is fair.
Calculating interest rates on land contract homes is pretty easy. It also depends on the agreement the seller and buyer make before signing the deal. For example, if you agreed on an interest-only payment, the amount you need to pay is only the amount financed multiplied by the interest. Say, the amount financed is $400,000 with an interest rate of 15%, then for an interest-only payment, you need to pay $60,000.
Another type is principal amount and interest. So if the principal amount is $200,000 with an interest rate of 5%, then you need to pay $210,000. But if your payments include principal, then the interest rates will decrease for each payment according to the deal.
Converting a Land Purchase Agreement into a Traditional Mortgage
After some years, you can refinance the house and put it on the market for a traditional mortgage. To do so, you need to make sure that you already fulfilled the requirements:
1) Improved credit – When you first bought the property, you used a land contract, which means at the time you aren’t qualified for traditional mortgages. It could be because of some other factors, but it doesn’t hurt to check your credit score before entering traditional mortgage markets.
2) Clean title – Make sure that the property is listed under your name before you put it under the traditional mortgage markets.
3) Proof of abilities – To be able to enter the traditional mortgage market, you need to make sure that you can afford the new loan. One thing you can do to prove this is to keep a debt-to-income ratio in line.
When you are sure that these requirements are met, you need supporting documents, such as:
- Asset and credit checks
- A copy of the fully executed land contract
- Payment history
- Standard income check
Afterward, you can convert the land contract to a traditional mortgage.
Land Contract Pros and Cons
Before sealing the deal on a land purchase contract, you might want to consider these pros and cons.
- Less time of closing the deal because the number of parties involved in land contracts is limited to seller and buyer only. Not involving a third-party traditional lender.
- The terms and conditions of the sale are tailored to both parties’ needs. But the document is still legally binding.
- It only involves seller and buyer, therefore no lender requirements are needed.
- Tax and income benefits for the buyer and seller alike. Buyers can refinance in the future to enter a traditional mortgage market.
- Title passing is done after the installment is fulfilled.
- The seller can be held legally responsible for inspection issues with authorities.
- Purchase prices and interest rates could be higher according to the seller’s asking price.
- Lack of protection of the property title could result in legal eviction.
That is all the info you needed to know before securing a real estate deal with a land contract. You are encouraged to work with an expert so you could be more sure about the deal. If you are seeking property investments, then a land contract could be your choice. It is also one of the most beneficial real estate deals. Since the buyer can possess the property right after signing the deal. Even though the title isn’t passed on directly after. You could also find land contract homes offerings through your real estate market in the area. It will give you the freedom to choose and negotiate the price with the owner.