What is a land contract?
If you’ve had trouble working with creditors in the past, or you lack some of the cash on hand needed to get the mortgage process started, you might question the need to apply via a lender at all.
In some scenarios, working directly with a seller can help alleviate some of the financial barriers standing in the way between you and homeownership. Land contracts are real estate agreements that outline the terms of a purchase between a buyer and seller for a tract of land. These agreements allow the buyer and seller to come up with their own financing terms, without the involvement of a third-party lender.
Finding a seller willing to move forward with a land contract presents its own challenge, but as the buyer, you might be able to negotiate a lower interest rate, down payment requirement or other reduced expenses. If you’re worried about your ability to afford a mortgage, land contracts might be a helpful alternative.
Since the legal rights associated with contract holders vary from state to state, “land contract” can be a broad term, with differing implications depending on where you live. Despite these geographic differences, seller financing is a common component of land contracts.
What is seller financing?
In a typical mortgage scenario, purchases are financed by a lender that provides the funds to the seller upfront. As a borrower, you would then pay back the lender in regular installments until the loan is fully paid off.
Land contracts, alternatively, don’t always involve a lender. Instead, you would have the ability to buy the property directly from the seller by making regular payments over a period of time. Rather than applying for a mortgage or making one upfront payment, seller financing allows for more flexibility when ironing out the terms of the sale.
Since lenders aren’t involved in the transaction, sellers are able to negotiate their own interest rate, down payment requirement and amortization schedule. Depending on where the transaction is taking place, a land contract might include a tract of land or any assets or buildings that exist on that land.
Given the many ins and outs of building a land contract, and the special considerations involved when not working with a lender, seller-financed agreements like land contracts can open up the potential for issues down the line. Without an experienced real estate professional overseeing negotiations, unexpected disputes and ownership issues can arise, making the whole deal more trouble than it’s worth.
Land contracts & real estate attorneys
With a law degree and years of experience in the real estate field, these attorneys are your best resource when aiming for a successful land contract. Here’s how hiring these professionals will benefit your negotiations in the long run:
- Protecting your interests
- Navigating documentation
- Building contingencies in the contract
Protecting your interests
Others involved in your homebuying purchase aren’t obligated to look out for your interests, and will likely seek out a way to get the most out of their end. Your real estate attorney, alternatively, works on your behalf.
An experienced lawyer can deal with any issues that arise and negotiate a productive solution to amend the contract when necessary.
While working out the details of a land contract, you’ll be swamped with documentation that is full of jargon and may be difficult to comprehend. While this lack of knowledge is understandable, the price of overlooking important filing requirements is too high of a risk.
A real estate attorney can help handle all of the financial paperwork throughout contract negotiations, including state and local property taxes. The attorney then ensures these fees are noted and appropriate.
Building contingencies in the contract
Throughout the negotiation process, certain questions will need to be answered that the average homebuyer won’t consider to ask. If the property is owned by a bank, was inherited or has additional claims to the title, there could be serious implications for the buyer down the line.
In these atypical, complex land deals, paying for a real estate attorney is well worth the cost.
Land contract advantages for buyers
If you’re looking to buy some property but are worried your credit isn’t sufficient to secure a mortgage, a land contract could be a useful option. Buyers with some financial hiccups in their past have the ability to bypass creditors and set up a purchasing agreement with the seller directly.
When applying for a conventional mortgage, a credit score of at least 680 will typically set you with a reasonable interest rate and minimum monthly payments.
Below that, your score could indicate a higher lending risk, potentially leading to a higher interest rate.
With a land contract, when no lender is involved, your seller will likely negotiate their own interest rate or ask you to cover additional fees if you make an offer while your credit score is low. They’ll also have the right to turn down your offer outright.
However, bypassing a lender’s approval process means less scrutiny over your credit history and existing debt. You’ll also avoid underwriting expenses and other costs associated with closing a conventional mortgage.
Land contract advantages for sellers
Land contracts offer a few key benefits that might work in your favor when looking to sell some property.
When the market’s average interest rates go up, fewer people are willing to take on a home purchase. This hesitancy means sellers have a much harder time marketing their properties and may turn to alternative selling options to attract a buyer.
A land contract might entice buyers who aren’t able to qualify with a third-party lender. As the seller, you’d have the flexibility to negotiate terms that these lenders aren’t able to match. If the buyer is short on cash for an upfront installment, you can forgo the down payment requirement. The interest paid on a land contract also goes directly to the seller, meaning rates can be negotiated free from the constraints of market averages.
Sellers working out a land contract can also structure the loan’s amortization as a “balloon payment,” meaning the buyer settles the outstanding principal sum at the end of a loan’s term. This financing structure repays mostly interest on a loan until the final payment, which finalizes the property’s transfer of ownership.
What are the disadvantages of a land contract?
A major disadvantage for both buyers and sellers that endeavor to work out a land contract is the potential for legal issues. Throughout the lifetime of the agreement, a myriad of changes or issues could arise that might change how the property is valued. The only way to ensure your land contract covers these potential hiccups is by hiring a licensed real estate attorney.
Having a real estate professional at your side shouldn’t be considered a disadvantage, but their services can cost a bundle. However, this pales in comparison to legal expenses you might face if a contract oversight causes disputes down the line.
Given the added complexity and special considerations that come with a land contract, it is especially important for both parties to hire their own legal counsel to work out a deal. In addition to this added cost, there are a few drawbacks specific to only the buyer with regard to these agreements:
By eliminating the need for a third-party lender, buyers and sellers involved in a land contract can negotiate their own terms for the transfer of ownership on a piece of property.
If you’re interested in buying a home, a land contract could be the alternative homebuying solution you need, with the seller taking the place of a lender. However, consumer protection laws don’t always apply to seller financed real estate deals. Before negotiations can even begin, it is vital that you work with a licensed real estate attorney to review the agreement on your behalf.