What are the pros and cons of entering a Land Contract?

Mark TiptonUncategorized

A Land Contract is a specialized legal agreement between a buyer and a seller of real estate.  A bank is not involved since, in effect, the seller acts as the bank for the buyer.  Typically, a down payment of several thousands of dollars is made.  Monthly installments are then to be paid for an agreed period, typically a year or more.  Then, at a stated time, the seller is to pay off the large balance owed with a lump sum payment, which is typically obtained via financing with a bank or mortgage lender. 

Such arrangements are often started via informal, personal connections between a seller and a buyer.  Real estate agents are often not involved; neither are banks.  Sometimes lawyers are not involved either.  What could go wrong?  Often, it turns out, a lot.  

First, let us consider the pros or positives of a Land Contract for a buyer.  The buyer obtains a house in which to live.  Also, there is an agreement for the buyer to own the real estate in the future.  The buyer may be able to obtain a better residence than by just renting.  Each monthly payment goes for more than just rent.   

What are the pros or positives of a Land Contract for a seller?  Often, there is a significant down payment made to the seller.  The seller is likely pleased to receive thousands of dollars from the start.  Also, there are monthly payments to be received.  What is more, there is a plan for a full purchase of the property at a designated time in the future.  

At first, these pros or positives may compel a buyer and a seller to enter a Land Contract.  But wait … there’s more.  As the months and possibly years go by, the terms of the Land Contract may NOT be fulfilled as agreed.  

For example, if you are the buyer, will you be able to make each and every monthly payment as agreed?  Will you able to make the agreed lump sum payment when it is due?  How will you obtain the financing when you could not obtain it from the start?  Is your credit good enough to obtain the home loan?  Even if you do everything as agreed, is the seller able to provide good title to the real estate upon payment of the agreed lump sum?  Or, are there other mortgages, liens, and/or judgments that prevent the seller from transferring good title to you at the agreed time?  

If you are the seller, will the buyer fulfill the terms of the Land Contract?  Will each monthly payment be made on time and in full?  Why do you want to be the buyer’s lender when professionals, such as banks, are not willing to extend credit to that buyer?  Will the buyer be able to obtain the necessary financing to pay off the lump sum when it is due?  Is the buyer maintaining the real estate in a manner which you like?  Also, is the buyer paying the real estate taxes on time and in full?  Is the buyer keeping the house insured?  If the buyer breaches the Land Contract, are you prepared to evict or foreclose on the Land Contract via a lawsuit filed in Court?  Are you prepared to pay the necessary court costs and attorney fees to do so?  

Oftentimes, Land Contracts are poorly considered and end in failure.  They are simply not fulfilled as agreed.  Remember that the quality of the seller and the buyer is very important, and Land Contract buyers or sellers may be far less than ideal.  Buyers often stretch their monthly budgets to try to afford the real estate, and Sellers are often led more by their hearts than their heads when entering Land Contracts.    

Alternatives to Land Contracts should be considered.  For example, a true sale of the real estate, with mortgage financing, is often a better choice because the transaction can occur without the parties continuing to be a part of each other’s financial lives.  Alternatively, a simple rental arrangement could be made until the seller is actually approved for sufficient financing.  

Be forewarned that Land Contracts often produce less than expected results and can lead to much frustration, financial loss, wasted time, and litigation.

Call attorney Mark Tipton of Tipton Law Firm, LLC for legal guidance. There is no initial fee to speak directly to the attorney about your real estate matter, and the telephone number to call is 419-636-0010.

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