Many people get excited about buying or selling properties, whether to use them as primary residences, secondary homes, income opportunities, or business hubs. Unfortunately, it takes more than a handshake to transfer real estate ownership, and there are many different types of setups used to complete the process — like traditional mortgages or rent-to-own agreements.
There are other options available, however, and that includes land contracts. This guide will discuss everything you need to know about such contracts, how they differ from traditional methods of transferring real estate ownership, and why they may be the best option for you when buying recreational land or the like.
What Do I Need to Know about Land Contracts?
Today, There are many ways to transfer property rights when you want to buy or sell a home. Most homeowners are aware of the traditional mortgage or even rent-to-own options, but not many people understand how these methods compare to a land contract. Here are a few quick facts to help clear up confusions about the options:
- Traditional Mortgages
These are structured to allow the mortgagor to borrow on a variable or fixed interest rate and make mortgage payments until the loan is completely paid off.
- Rent-to-Own Agreements
These agreements are deals that allow you to rent a property for a specific period of time, with the option to buy before the lease runs out. The buyer must qualify for a traditional mortgage within a particular time frame, typically one to five years.
- Land Contracts
These are agreements between sellers and buyers pertaining to a specific piece of land. Under this type of installment sale, the seller provides the financing in the purchase and the buyer repays the loan in monthly payments. Basically, land contracts are a form of seller financing.
A land contract is similar to a mortgage, but the buyer makes payments to the seller or the real estate owner instead of borrowing money from a bank or a lender. When the full amount is paid, the legal title is transferred to the buyer by way of warranty or other deed used to convey title. The most significant difference between rent-to-own agreements and land contracts is that the seller maintains control and responsibility for the property in the former, and will be on the hook to maintain the property — including paying property taxes, insurance, and any repairs.
Who Might Opt for a Land Contract?
Land contracts can be extremely advantageous to both a seller and a buyer. Efficiency, lack of formality, and simplicity are among the top reasons individuals enter into this type of contract. Here are some other benefits for each party.
What are the Buyer Benefits in a Land Contract?
Buyers who are interested in a specific piece of real estate for sale but cannot obtain approval for a mortgage because of their credit history can enter into a deal by land contract. This means:
- The buyer is able to make the same types of payments as a traditional mortgage.
- The buyer does not need third-party financing to be able to purchase a home.
- The buyer pays monthly installment payments directly to the seller.
The main advantage of a land contract for a buyer is that it is easy to qualify for — a seller just needs to agree to the setup. As an added bonus, a buyer does not need to go through a complicated foreclosure process if he defaults. Instead, the seller simply retains the property.
What are the Seller Benefits in a Land Contract?
Under a land contract, a seller does not receive the full purchase price upfront, but can get many other monetary benefits. Under a land contract, the seller can:
- Negotiate a higher purchase price on the property.
- Require a larger down payment.
- Enjoy a steady cash flow like with a rental property without the hassle of managing one.
- Avoid paying capital gains taxes all at once.
- Have the taxable income be spread over a period of time.
In addition, if negotiated correctly, the seller can also gain a more significant overall profit due to a higher interest rate.
How Does a Land Contract Work?
Land contracts are typically referred to as contracts for deed or installment contracts. They are a security agreement between a seller (vendor) and a buyer (vendee).
Under a land contract:
- The vendor will agree to sell real property by financing the purchase for the vendee. Such contracts for deed are less costly to execute, as there are no origination fees, closing costs, or formal applications.
- The vendor retains the legal title, and the vendee receives an equitable title. This differs from a more traditional deed of trust in that the title to the property passes to the vendee at the point of sale.
- Note: Under a traditional deed of trust, the vendee signs a promissory note and promises to pay back the trust deed while the property title is placed in a trust with a third party. If the vendee does not make their note payments, the ownership of the property will be transferred to the lender.
- The financing involved in land contracts can include an existing mortgage balance or the property can be free and clear.
Once all the payments are made, the vendor hands the vendee the deed to the property.
Making a Land Contract Work For You
While these land contracts can provide parties with numerous advantages over a traditional mortgage, there are still many risks involved with this process. They can be an excellent option for both buyers and sellers, but their complexities and specific real estate laws can make them challenging to execute. The terms of the contract need to be carefully discussed and examined before anything is decided, too, which means you may want to speak with a professional team of experts before you make any commitments.
If you are interested in a land sales contract as part of your real estate transaction or would like more information about the process, the perks for buyers or sellers, or what you need to know to properly execute one, contact Nomadic Real Estate today! Our qualified experts can walk you through any land contract agreement questions you might have and help you decide if one is the best option for you.