Land Contracts – What Are They and How do They Work?

By

|10 min read

Click here to browse our Real Estate Agent Directory and contact top-rated agents in your area!

Land contract

Land contracts can be a great alternative to purchasing a home through a bank or traditional lender. They allow people who might not be able to buy a home with a traditional mortgage, a way to purchase.

Rent-to-own leases are other ways to purchase a house on a non-bank loan. If you are interested in purchasing a house on land contract, be sure you know all the ins and outs of the agreement.

Read on to lead exactly what a land contract is and how it can be a good alternative to traditional mortgage financing.

What is a Land Contract?

A land contract is an agreement between the owner of the property and the buyer that facilitates the sale of the property or vacant land without a traditional mortgage. Basically, the buyer and seller would work out the terms, like interest rate and payment schedule, and payments go directly to the owner or seller.

This can be especially helpful for those buyers that have bad credit, no down payment, or other financial reasons that usually exclude them from buying a home.

The legal title for the property remains with the owner until the land, property or house is paid off.

This type of contract can be called land contract as well as an installment land contract, land sale contract, deed contract, real estate contract, and bond for title to the property.

How does a land contract work?

Agents and specialists in land contract home buying can assist buyers and sellers in finding each other. It is easy to search online for terms like “Land for sale” or “Land for rent”.

After both parties are on the same page, the contract terms for the land contract are ironed out. Things that need to be included are length of time, down payment, what the buyer pays, who will be paying property taxes, interest rate, etc.

The real estate owner may require monthly payments in the land contract terms or a balloon payment, this is why it’s important to review and know everything in the contract before agreeing.

Negotiating conditions for the purchase of land. It is necessary for you to get professional assistance from a real estate attorney since the rules around contracting differ between states and it’s important to follow them.

What is the Difference Between a Land Contract and a Mortgage?

Mortgages are done by large banks and lenders who deal with a lot of requirements and red tape. There is often little flexibility on rates and who can get them as requirements are set at a high level.

Land contracts are much more flexible as they really only involve the buyer and the seller. For this reason, every contract can be very different.

What is Included in a Land Contract?

This is how land contracts work. Land contracts typically will outline all the needed details to make sure both parties are on the same page. These things include, but are not limited to:

  • total sales price of the property
  • down payment amount
  • installment payments amount
  • balloon payment terms
  • interest rate
  • who is responsible for what
  • legal title settlement

Pros and cons of buying land contract homes

Land lease agreements are generally a good idea if you are in a situation where it can help you purchase real estate. There can be a lot more flexibility in these types of agreements. But, as with everything, there are pros and cons.

Pros to Land Contracts

There are a lot of pros when it comes to land contracts. Here are a few:

Pros

  • Gives people an opportunity to purchase when they might not have been able to otherwise
  • Fully handled by the buyer and seller
  • Flexible interest rate depending on the seller
  • Flexible closing costs

Cons

  • The seller’s finances and situation can break the deal if they aren’t able to pay the mortgage on their end
  • Contracts can have unknown loopholes or miss details
  • Higher interest rates since the seller knows they buyer can’t get a traditional mortgage

Negotiation Process

Though some state laws may specify requirements on land agreements, they generally fall on the buyer and seller. A property contract would suggest the purchaser has all the power, but this is not always true.

Buyers should be aware of everything that is stated in the contract and ensure they agree. Remember, this could be a long term agreement you have will a home or property owner and being sure you actually agree with the terms is important.

Buyers must demand certain safety features and make them clear in the contract to protect their interests. It is recommended they seek the help of an attorney (ideally a real estate professional), who doesn’t represent sellers. Buyers considering seller financing are often unaware that they need an attorney but they can be enormously helpful.

land contract agreement conversation

Types of contracts

Land lease agreements are usually similar to leases with an option to purchase (purchase option). Land contracts are agreements to acquire, while leases and lease options are not.

The name Land Contract can imply different things but the owner of the land is technically the official owner until the title is turned over. This can get murky as the buyer has made payments and is therefore the owner of at least some of the land.

Be sure the purchase price is agreed to and is not subject to change over time.

How to calculate interest rates on land contract homes?

In some cases, payments on land contracts are not interest-only but also include interest in some cases. Unfortunately, there is no actual land contract calculator. If the interest is charged only, multiply the sum of interest by the interest rate and divide this result by the annual installments.

For example, the monthly payment on a $200,000 land contract would cost about $1500 if the interest rate was 2% over 15 years. In case a principal amount has been paid in advance the installments amount will decrease with the credit history and be different from the previous installments.

Should You Enter a Land Contract?

In the end, a land contract can be a good idea if you are in the situation where it makes sense. As a reminder, be sure you know all the language that is in your written legal contract and be sure you can agree to it before signing.

As mentioned, it’s always best to work with a real estate attorney and real estate agent that knows how to handle these types of contracts. Contact one today and get the ball rolling.

Real Estate Experts

FastExpert is a real estate agent directory that ranks agents by location according to client ratings and past home sales history. Our goal is to give you all the information you need to choose the right real estate agent for your needs. Users can search by specific traits that are important to them as well as see specific addresses of homes agents have sold in the past.

You may also be interested in...

Homebuyers: 5 Maintenance Items You Must Tackle Immediately

>>Find a Top Real Estate Agent<< Homebuyers are already tasked with many things to do before purchas… read more

What is the Hardest Part About First-Time Homebuying?

FastExpert partner and Kerrville, TX REALTOR®, Caitlin Hamilton, breaks down the hardest part about first-ti… read more

Who Pays Buyer’s Agent Fees?

Who Pays Buyer’s Agent Fees?

Most buyers and sellers work with licensed Realtors when entering the real estate market. According to the Na… read more

I am a Realtor. Here’s How The Real Estate Industry Works

>>Find the Best Real Estate Agent<< There are many professions where the professionals mak… read more