A land contract is a contract between the buyer and a private seller of a property, wherein the seller holds the title or deed to the property until all agreed upon payments have been made in full. The laws governing such contracts can vary by jurisdiction, so it is important that the governing laws be consulted to understand the particular rules that control a specific scenario. The property at issue may be improved or unimproved, vacant, or a home or a commercial building. A down payment is usually made, and then equal monthly installments are paid until the property is paid for or until a balloon payment is required. A balloon payment is a lump sum of money that is due at a specified time, in this case at the end of the course of monthly payments.
It can be helpful to compare a land contract to renting or leasing with the option to buy, though they are not entirely one in the same. Such options are different in that the agreement is usually filed and is a legal arrangement, giving the renter or lessee the option to buy the property at a prearranged time during the loan. Rent payments then become equity in the property.
Although in many places it is legally required, a land contract may not always be recorded, making the legal recourse of the buyer tenuous should the agreement be flawed in some way. For example, if the seller still owes a mortgage on the property, the buyer assumes that the seller will use his monthly payments to pay the mortgage as well as any taxes or other liens, keeping the title free of encumbrances. If this occurs, the buyer owns the property free and clear at the end of the contract. If the seller does not keep up with payments owed, however, there could be trouble for the buyer. For this reason, getting the agreement in writing is important.
While this type of agreement can seem very attractive to a buyer who is unable to secure a conventional loan, there can be pitfalls to such an arrangement. Many sellers don't file or record the proper papers, sometimes because the seller's lender would not agree to a sublet agreement or contract. The lender may have stipulated that the borrower must have possession of the property. Making an end run around this provision by refusing to file the paperwork can cause problems if the lender becomes aware of the situation.
The lender can demand payment in full of the loan, forcing the buyer to procure a loan to pay off the mortgage if he does not want to give up the property. If they buyer can't come up with the money, he'll lose everything he has invested in the property and be forced to move out. This can be especially painful if the buyer has also spent money and energy improving the property.
Even if there is no mortgage on the property, there can be back taxes or other liens that the seller owes, which could cause the buyer to lose the property or force him to come up with extra money. If a person decides to take part in a land contract, he should make sure the title to the property is clear. It is also important that the buyer make sure the seller intends to file the proper papers. If a potential buyer is unsure about any aspect of the agreement, he should consult with a real estate lawyer.