Land Contracts

The use of land contracts is increasing as traditional financing is not available to most purchasers based on increased lending requirements and decreased appraised values. Use of a land contract may be the only way to close a sale in this slow real estate market. This relieves the seller of continuing to pay the carrying costs, taxes, maintenance and insurance for the property while waiting for a purchaser with bank financing. A land contract seller may also be able to charge up to 11% interest on most land contracts which can be very attractive compared with other investments.

Land contracts typically provide for equal monthly installments of principal and interest amortized like a bank loan with a balloon payment due at the end of an agreed upon term such as one, three, five or 10 years. Some land contracts are fully amortized over a 15, 20 or 30 year term.

A purchase agreement should be executed by both seller and purchaser that outlines the material terms of the transaction, including tax proration, and land contract financing. As with all real estate transactions, we recommend, the following be obtained as minimal due diligence before the closing:

  1. title insurance commitment;
  2. survey;
  3. inspections as appropriate to the type of property;
  4. verification of zoning, lot splits, access, etc.; and
  5. availability of insurance protecting the parties from destruction of the premises and liability.

Breach of the land contract by the purchaser usually results from non-payment of the land contract or property taxes. The seller may file suit to obtain:

  1. Specific performance of the land contract;
  2. Forfeiture of the land contract; or
  3. Foreclosure on and sale of the land contract property.

The seller should consider requiring the purchaser to pay 1/12 of the annual real estate taxes each month to seller so that seller makes sure the taxes are paid each year.

Breach of the land contract by the seller usually results from failure to deliver the deed upon full payment by the purchaser or failure to deliver title free of tax liens, mortgages or other liens. The purchaser may file suit to obtain:

  1. Specific performance of the land contract;
  2. Quiet title;
  3. Cancellation of the land contract; and
  4. Money damages.

The purchaser should consider requiring a memorandum of the land contract be recorded to protect purchaser against later liens of the seller.

Land contracts are not without risk and are rarely the first choice for sellers or purchasers. With proper planning and due diligence the risks of using this financing device can be greatly reduced for the parties. Until conventional financing becomes more available we expect the use of land contracts to continue increasing.

Categories: Real Estate Law