Land ownership is lucrative. You can put raw land on lease for passive income, hold and then resell it at a higher price, or even build your dream house on it. On top of that, you can leverage seller financing to buy a plot of land in the USA without mortgage financing and a huge debt.
A land contract or contract for deed is beneficial, especially for small investors who don’t want to borrow money from banks or lenders. If you are planning to purchase land and unsure whether to sign a land contract or not, ensure you understand how the land contract works before making any decision.
What Is a Land Contract?
A land contract is a security agreement between a property seller and a buyer. It’s a seller-financed substitute for mortgage financing, often utilized when property buyers require casting aside mortgages or are unqualified to apply for a loan.
A land contract allows buyers to purchase real estate properties, including raw land, a commercial building, a house, an apartment building, etc. Although a land contract and a mortgage are identical, a buyer that signs a land contract makes payments to the property owner until the property price is fully paid off, rather than a bank or a lender.
Legal contracts are also known as real estate contracts, memorandums of contracts, installment land contracts, and contracts for deed.
How Does a Land Contract Work?
A land contract typically involves only two parties, a seller referred to as the vendor, and the buyer, also known as a vendee.
- In a land contract, a property vendor agrees to finance the property for the buyer after a buyer agrees to meet the terms mentioned in the land contract.
- As per the regular land contract, a seller retains the legal title to the property, and a buyer is given an equitable title until the land contract is fully paid off.
- A land contract includes information, such as the description of the property, names & addresses of the seller and buyer, purchase price, loan term, interest rate, down payment, payment schedule, the applicable penalty for late payments, etc.
- A land contract allows a buyer to pile up equity in the property and ensures the vendor can’t sell the property to other buyers. Moreover, the buyer gets the power to occupy and improve the property.
Reasons to Sign a Land Contract
The process of buying a real estate property involves certain risks that a land contract can easily prevent. For buyers, there are a few reasons to sign a land contract. First off, a land contract locks in commitment to buy a property that you wish to own. It keeps other buyers from getting hold of the property from you. Last but not least, buyers with insufficient funds can purchase the land through installment and get complete ownership after paying the full price.
Why Use a Land Contract?
As a buyer, you get plenty of advantages by signing a land contract without risks. Investors who are interested in legitimately buying a piece of land or unwilling to borrow money from banks and lenders should use a land contract.
Since mortgages are meant to be sold to prominent investors, it requires mortgagors to agree to several terms regarding payments. Nonetheless, with land contracts, there is a possibility buyers can negotiate terms with the seller.
To put it simply, a land contract is only a rent-to-own agreement and the state that the property purchase process will complete at a future date.
If you don’t qualify for loans or are seeking to buy a property through affordable down payments, a land contract will serve the purpose.
There are fewer restrictions for buyers, and closing costs are cheaper. Despite all these benefits, as a buyer, it’s crucial for you to take a close look at the interest rates, outstanding liens that can affect your ownership.