What is a Land Contract and How Does it Work?

Definition: What is a land contract?

A land contract, also called an “installment land contract” or “contract for deed,” is a seller-financed way to buy or sell real estate. Instead of using a bank, the buyer makes payments directly to the seller. The seller retains legal title of the property until the buyer pays the full purchase price, at which point ownership is conveyed.

Let’s break it down:

• Buyer gets possession right away and makes regular payments.
• The seller keeps legal title to the property until the buyer completes all payments.
• Once paid in full, the legal title transfers to the buyer.

Land contracts could often include a balloon payment at the end and typically outline purchase price, interest rate, term, and responsibilities.

In short, the buyer makes installment payments directly to the seller over a specified period, typically with interest. Once the buyer completes all the payments, the seller transfers the legal title to the buyer.

How Does a Land Contract Work?

A land contract is a real estate agreement where the buyer makes payments directly to the seller, rather than getting a mortgage from a bank. The seller finances the sale and keeps legal title until the contract is paid in full.

Key Features:

• Seller financing: The seller acts as the lender.
• Direct payments: Buyer pays the seller in installments.
• No bank involved: Easier access for buyers who can’t qualify for a mortgage.
• Possession & responsibilities: Buyer usually takes possession, handles taxes, insurance, and maintenance.
• Title transfer: Buyer gets legal title only after completing all payments.

Typical Structure:

• A down payment upfront
• Monthly payments with interest
• A final balloon payment in some cases

The payment amount is negotiated between buyer and seller and may vary based on the sales price, interest rate, and term length.

This setup offers flexibility but comes with risks, especially for buyers if they default. It’s crucial that the terms are clearly outlined and agreed upon in a written contract.

Throughout the land contract, the buyer is responsible for maintaining the property, paying property taxes, and keeping insurance coverage.

Land contract vs mortgage: What’s the difference

But how does a land contract differ from a mortgage? The main difference between a land contract and a conventional mortgage is the ownership structure and financing method. 

• Land contract = Seller financing equity in property but seller keeps the legal title.
• Mortgage = Property is sold and title is conveyed to the buyer/borrower on public records.

In a land contract, taxes and insurance are usually paid separately by the buyer.

Can a land contract be converted to a mortgage?

Yes, a land contract can be converted into a traditional mortgage. Once the buyer builds equity, provable income and credit, they can refinance with a bank. This helps secure better terms and officially transfers the title.

Differences Between a Land Contract vs Rent-to-Own

While both land contracts and rent-to-own agreements offer alternatives to traditional home financing, they work differently. In a traditional land contract, the buyer gains an equitable title and works toward ownership from the start:

Ownership Path:

In a land contract, the buyer is working toward ownership from day one. They make installment payments that go directly toward purchasing the property.

In a rent-to-own setup, the buyer rents the property with an option to purchase it later. Only a portion of the rent may go toward the purchase price.

Legal Title:

With a land contract, the seller holds legal title until the contract is paid in full.

In rent-to-own, the seller retains both legal and full ownership until the renter chooses to exercise the option to buy.

Financing:

A land contract is seller-financed from the start.

Rent-to-own usually requires the renter to secure financing later if they decide to purchase.

Commitment:

Land contracts are binding purchase agreements.

Rent-to-own agreements often allow the tenant to walk away if they choose not to buy.

Both models offer flexibility but differ in legal structure, financial responsibility, and commitment levels.

Land contract pros and cons

Here are some pros and cons to consider before entering into a land contract:

Land Contract Pros for the Seller:

• Consistent monthly income: With a land contract, you receive monthly payments from the buyer, which can provide a steady income stream.
• Higher potential gain: The interest rates on a land contract are typically higher than those of traditional mortgages, which means a higher return over time for the seller.
• No real estate agents or commission fees: No real estate agents are involved in the transaction; thus, you don’t need to pay any commission fees. Using a land contract allows both the buyer and seller to save money on these fees.
• Accessible financing: Land contracts can help buyers who can’t qualify for a traditional mortgage due to credit issues or a lack of down payment.
• Flexible terms: You can negotiate the terms of a land contract, including the interest rate, payment schedule, and other conditions. It allows for more customization than a traditional mortgage.
• Faster sale: Since there is no need for third-party lender approval, land contract transactions can close more quickly than traditional mortgages. This speed can be beneficial to both buyers and sellers.
• Reduced tax gain liability: With a land contract, the seller receives installment payments on the property over time rather than a single lump sum. This payment structure helps you spread the capital gains tax across multiple years.

Cons:

• Buyer default risks: Sellers take on the risk of a buyer default. Suppose the buyer fails to meet their payment obligations. In that case, you may need to undergo a lengthy legal process to reclaim the property.
• Responsible for property’s legal title: The seller remains responsible for the property’s legal title until the contract is paid in full. If the buyer fails to maintain the property or pay property taxes, you may also face legal challenges and liabilities.
• Limited liquidity: There’s a limited market for these contracts. You may need to accept a discount to attract buyers.
• Spread of sale proceeds: Seller won’t have immediate access to all the cash from the sale. You may also be exposed to the risks and uncertainties associated with long-term payment plans.

In which states are land contracts used?

Land contracts are used in many states across the United States. However, the laws regarding land contracts vary from state to state. For example, Ohio Revised Code Chapter 5313 regulates land contracts in Ohio. 

In Michigan, the enforcement of land contracts falls under the general category of contract law. State law permits the use of land contracts as legally binding agreements in Michigan, but in order to be enforced, the contract must be in writing. 

Thus, we recommend that you research and understand your state’s regulations and requirements before entering into a land contract.

How Does a Land Contract Work in Michigan?

In Michigan, land contracts are legal and widely used. The contract must be in writing to be enforceable, and the seller retains the legal title until the buyer completes all payments. Forfeiture is the most common remedy if the buyer defaults, which is typically faster than foreclosure in Michigan.

How Does a Land Contract Work in Ohio?

Ohio land contracts are governed by Ohio Revised Code Chapter 5313. If the contract term exceeds 5 years or the buyer has paid more than 20% of the purchase price, foreclosure is required rather than simple forfeiture. Contracts must be recorded, and buyers have specific protections under state law.

How Does a Land Contract Work in Indiana?

Indiana recognizes land contracts as legally binding. The enforcement method—whether forfeiture or foreclosure—depends on the contract’s terms and the county’s practices. Recording is optional, but can offer added protection to buyers.

How Does a Land Contract Work in Wisconsin?

Wisconsin allows land contracts under statute and case law. The seller keeps the legal title until final payment. If a buyer defaults, sellers typically use forfeiture to reclaim the property. Recording the contract is not required, but it can help clarify ownership rights.

Land Contract State Comparison Table

State Notes

• Michigan: Contracts must be in writing. Forfeiture is often faster than foreclosure.
• Ohio: Contracts longer than 5 years or with 20% equity require foreclosure.
• Indiana: Flexible, but local practices may vary. Enforcement depends on contract terms.
• Wisconsin: Heavily shaped by case law. Forfeiture is a common remedy.

Alternatives to Land Contracts

• Traditional mortgage
• FHA/VA/USDA loans
• Bridge/Hard money loans
• Rent-to-own
• Owner financing
• Lease option
• Home equity loans or lines of credit

Selling your land contract

If you are tired of collecting installments and want to sell your land contract for a lump sum, you can do so, similar to a mortgage note.

However, selling your land contract requires a strategic approach to maximize return on investment and ensure a smooth transaction. We highly recommend working with an experienced land contract buyer.

Cash in today

Do you want to sell your land contract or mortgage note and get a cash offer today? If you are seeking expert assistance in navigating this complex financial landscape, Amerinote Xchange can help.

With over 30 years of experience in the note-buying industry, our team of expert mortgage buyers and land contract buyers is well-equipped to guide you through the process and ensure a successful transaction. Contact the Amerinote team today, or check out our FAQ section now.

FAQs — How does a land contract work?

What Happens If the Buyer Defaults?

The seller may reclaim the property through forfeiture or foreclosure, depending on the state. The buyer can lose possession and any equity built up.

Do Land Contracts Affect Credit?

Usually not, unless payments are reported to credit bureaus. However, lenders will check payment history during refinancing.

What’s the Difference Between a Land Contract and a Deed of Trust?

A deed of trust uses a third party (trustee) to hold legal title during the loan. With a land contract, the seller holds title.

**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.**