The most familiar way to sell your house is to a buyer purchasing with cash, or a mortgage. The vast majority of deals use one of these two methods. Sometimes, though, a different type of financing is needed to complete the sale. A land contract is a popular alternative financing option. Let’s take a look at land contracts.
What Is A Land Contract?
This is a written legal agreement used to purchase real estate. It’s a form of seller financing that’s similar to a mortgage, but instead of taking a loan from a bank, or mortgage company, a buyer makes payments to the seller, or homeowner. Both parties sign a contract that covers the terms and conditions of the sale. Once the final payment is received, the legal title of the home transfers to the buyer by way of a deed (usually a warranty deed). As with most types of seller financing, a land contract has a variety of pros and cons to both parties involved. For the sake of this article, we’ll be focusing more on the seller’s perspective.
Selling on a land contract opens up the property sale to more potential buyers. This could be helpful in a slow market.
Selling a house through a land contract attracts buyers who otherwise would have trouble purchasing the property with traditional financing. The buyer does not pay the full purchase price at the initial closing. Because of these items, a seller may be able to negotiate a higher sales price. In addition, the seller usually requires a higher down payment.
The seller has the flexibility to set the terms, including the interest rate and length of the loan. The rate charged is typically higher than that charged by a traditional lender, but must be reasonable, and in-line with usury laws.
The land contract term is typically much shorter than a traditional mortgage. It is usually 5 – 10 years. At the end of the term, there is usually a balloon payment. The balloon payment pays off the balance of the sales price, minus the payments made.
The buyer is responsible for paying the property taxes, property insurance, utility bills and property maintenance and upkeep.
By the seller acting as the bank, there is no appraisal requirement. Though the seller should conduct some form of a credit, identity and legitimacy check by using for instance, the services of the KYC provider company Fully-Verified, the process could be quicker than a traditional process. The quicker time to close is more in line with a cash sale. It is particularly beneficial to a seller who needs to sell quickly.
A Steady Stream of Cash Flow
Unlike a traditional mortgage where the buyer makes monthly payments to the lender, with a land contract, the seller collects monthly payments of principal and interest, until the buyer pays off the land contract.
Waiting For The Full Sales Price
The seller does not receive the full purchase price at closing.
Possibility Of The Property Coming Back
If the buyer defaults on their monthly payments, you may be forced to foreclose on them. You would get the property back, but once again you are responsible for the taxes, insurance and utility bills. If you had a previous mortgage on the property, and the land contract down payment and monthly payments did not pay it off, you’ll still have that burden, without the benefit of receiving land contract payments.
A buyer who defaults on the payments can be a problem for you. One way to counteract this is by filing a Land Contract Forfeiture. This is a legal procedure to foreclose, and remove the buyers from the house.
A forfeiture results in the buyer forfeiting the property, and giving up all the money they paid to the seller. While this protects the seller, it does take a lot of time and effort to go through. It could take several months. It also puts additional financial burdens back onto the seller.
STEPS OF CLOSING ON A LAND CONTRACT
STEP 1: Signing the Land Contract
Just like any real estate transaction, a land contract deal starts with a purchase agreement. The land contract will include the terms and conditions of the sale, including: the purchase price; down payment; loan duration; interest rate; monthly payment amount; how many payments; penalty for late payments; if a balloon payment will be made, and amount and closing date. Including an amortization schedule is helpful too.
The buyer temporarily becomes the owner of the property (unless they default) and are responsible for property taxes as well as any utility bills that are directly billed to the property.
STEP 2: File a Memorandum of Land Contract
This memorandum is filed with the city and county. It is a legal document simply giving public notice of the buyer’s interest in the property. It identifies the buyer and seller, the legal description of the property and the date of the land contract. The completed deed will not be filed until the seller receives the final contract payment.
STEP 3: Draft the Deed
The deed transfers the legal title of the property to the buyer. Since the buyer will still owe money to complete the full purchase price, the legal deed is held in escrow, until the final payment is received by the seller. A title agency or a financial institution may hold the deed in escrow for the buyer and seller. The buyer receives “equitable title”. This gives the buyer interest in the property. This prevents the seller from interfering in the buyer’s interest, or engaging in any transaction that would put a lien on the property. The legal title is filed after the seller receives the final payment.
STEP 4: Closing Statement
The purpose of this statement is to show an accurate description of all accounting debits and credits involved in the sales transaction. It should also include an amortization schedule showing the payments of the buyer to fulfill the financial obligations to the seller. A closing statement is usually done by a title agency on behalf of both parties.
There are times when land contracts may be a good, or sometimes the only option available for home-sellers. A seller has to weigh the pros and cons, and make sure they have a good handle on the land contract terms. At SellUsHomes, we are cash buyers, and purchase homes in as-is condition. We purchase land contracts as well. Our goal is to make your home sale go smoothly and quickly. To learn more about how we can help you sell your home, contact SellUsHomes at (734) 224-5947, or send us an email at firstname.lastname@example.org.