How Does a Land Contract Work?
Posted by Admin on February 16, 2019 | 1 Comment
So the big question of the day is: how does a land contract work? Before we dive into that answer, you should be asking, what is this type of contract? How do I apply this to benefit me in a property sale?
Well, this type of contract is a method of purchasing real estate. It is a written, legally binding contract that allows the borrower to buy a home, building or piece of land directly from a seller, rather than via a bank loan or traditional mortgage.
Under the agreement, the buyer agrees to make some sort of down payment up front and will then repay the remainder of the balance — plus interest — over a pre-determined period of time. The interest rate, monthly payment and length of the repayment period can vary greatly and depend wholly on the unique agreement the buyer and seller come to.
So, how does it work? It is similar to any other seller-financed sale, in that it usually requires a down payment, interest and regular payments over time.
The biggest thing to note with land contracts is that the borrower does not get legal title to the property until the seller has been fully repaid. In the meantime, they hold “equitable title,” which allows them to inhabit the property and make changes to it as if it were their own. Only once the buyer has paid off their debt can the deed and legal title be transferred to their name.
How does this type of contract work in my state?
Some states use land contracts more than others. Michigan for example, uses them more than any other state in the country. Other states that use them often include Ohio and Wisconsin. It would be wise not to jump in too quickly until you have a firm understanding of how this works. Make sure to study up on how land contracts work in your state (and work with a local attorney) before moving forward with one. We would recommend consulting an attorney before pulling the trigger. Especially if you live in one state and you need to know how does a land contract work in Michigan. A good website resource to find an attorney within this field of practice in a specific state is www.Avvo.com.
Is this type of contract a good idea?
When it comes to creating a land contract, pros and cons abound. Whether it’s right for your specific situation depends on your goals, your finances and how quickly you’d like to move your property.
If you’re hoping to sell your property fast, a land contract can help you do it. These types of instruments don’t come with all the stringent credit requirements and underwriting processes of a bank or mortgage lender, so they typically mean a much faster sale on the whole. They also allow you to work with less-than-perfect buyers who might not qualify for traditional loans or financial products.
As a seller, this can also mean consistent interest payments (and income) over the course of many years. If you’re looking to retire soon, save up or make any investments, this can be a huge benefit.
Land Contract Pros and Cons
All in all, the advantages include:
1. No real estate agents or commission fees
2. A faster sale
3. Ability to work with buyers with poor credit or low savings
4. You can earn interest and consistent income for many years
5. Reducing the large impact of capital gains taxes
1. May require an experienced real estate attorney
2. Means holding onto the property in your name for some time
3. Spreads out your sale proceeds, rather than delivering it in one lump sum
When land contracts are involved, buyers may often feel ownership of the home, long before they’ve made their final payment. They might make upgrades, changes and other alterations to the property or even damage it. If the buyer defaults on the contract or is unable to secure a loan to pay off the rest of their debt, this could leave a seller with costly repairs and a difficult-to-move property.
Selling Your Contract
As with any mortgage note or loan, you can choose to sell your land contract if you’re ever tired of collecting on it or you’d just like to cash in on the property for a lump sum. In this case, you would seek the guidance of a land contract buyer – someone who specializes in purchasing real estate contracts, notes, loan portfolios and more.
Land contract buyers consider a number of factors when making you an offer. They’ll look at the down payment the buyer put down, their credit score, the interest rate you put on the loan, the buyer’s repayment history and, of course, the remaining balance on the property. Once all has been evaluated, they will make you a cash offer which you can accept or decline.
Keep in mind that a land contract buyer won’t be able to offer you the full remaining balance of your contract. They will, however, free you from collecting on the contract, as well as give you a lump sum of money that you can put toward retirement, other investments or any other venture as you see fit.
Structuring The Contract
If you want to make sure you get top dollar for your land contract when it comes time to sell, then make sure structure your contract with an eventual buyer in mind.
Generally, land contract buyers want to see:
1. A decent-sized down payment (15 percent or more, ideally)
2. A low-average buyer credit score (over 600, but higher preferred)
3. A term of 10 years or less
4. Interest rates that are 3 to 6 percent higher than current market rates (within state usury laws)
5. Solid proof of repayment (they usually want at least one to five months of consistent payments via bank records)
6. Professionally prepared contracts and documents (created by an attorney or title company)
They also tend to steer clear or pay less for land contracts with interest-only and balloon-payment structures (with poor credit score buyers), so keep this in mind as you negotiate with your buyer. In the end, there are lots of land contract buyers you can choose from. Make sure you select one with experience and who will offer you a quick, competitive and no-hassle quote.
Cash in Today
Still wondering how does a land contract work? Collecting on a land contract and want to know your options? Reach out to the Amerinote team today or check out our FAQ section now.
**Disclaimer: The Amerinote Xchange is an experienced mortgage note investor, but we are not licensed attorneys. The information contained in this content should not be construed as legal advice. You should always seek the advice of a licensed attorney for guidance on your specific situation.**