What is a Land Contract and How Does it Work?

Jennifer Park
Published: February 16, 2019 | Updated: March 17, 2024

Do you know about land contracts? Do you know how a land contract can benefit your real estate investment? If you want to realize all its benefits, understanding the intricacies of land contracts is equally essential.

Let’s explore what a land contract is, how it works, the pros and cons, how to sell one, and other crucial details.

How does a Land Contract work

What is land contract?

A land contract, also known as an “installment land contract” or a “contract for deed,” is a seller-financed method of purchasing real estate without involving a bank. Basically, it’s “seller financing” instead of “bank financing.” 

It’s an arrangement between a buyer and seller where the seller finances the sale of a property to the buyer. The seller holds the “legal title” to the property, while the buyer acquires an “equitable title.” The buyer has possession of the property and can use it but only receives full ownership after paying the contract in full.

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 a land contract works 

A land contract works as an alternative to a traditional mortgage or a deed of trust. As a seller, you essentially act as the lender for a buyer who wants to purchase a property but does not have the means to do so outright. Thus, it involves a series of installments the buyer makes directly to the seller over an agreed-upon period. 

The land contract outlines the terms of the agreement, including the purchase price, interest rate, payment schedule, and any other relevant conditions.

Once the buyer and seller agree on the terms, they sign the contract, and the buyer begins making installments. The buyer holds equitable title and can use the property during this time. The seller remains responsible for the legal title until the buyer pays off the purchase price in full.

Often, land contracts include a balloon payment, which is a large lump sum due at the end of the contract term. This final payment allows the buyer to pay off the remaining balance and receive the legal title to the property.

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

How Does a Land Contract Work

What is the difference between a land contract and a mortgage?

The main difference between a land contract and a conventional mortgage is the ownership structure and financing method. 

In a land contract, the seller acts as the lender, whereas a traditional mortgage involves a bank or credit union as a third-party lender. The bank holds the mortgage on the property until the borrower pays off the loan.

Additionally, mortgage payments usually include principal, interest, property taxes, and insurance. In contrast, land contract payments typically only cover the principal and interest. The buyer is still responsible for property taxes and insurance but pays them separately.

Can a land contract be converted to a mortgage?

Yes, a land contract can be converted into a traditional mortgage, a process often referred to as refinancing. Once the buyer under a land contract has built up sufficient equity in the property through their installment payments and has improved or maintained a good credit score, they may seek to refinance the property through a traditional mortgage lender. 

How to convert a land contract to a mortgage 

Converting a land contract to a mortgage can be a great move for several reasons, like securing a lower interest rate, reducing monthly payments, or cashing out equity. Here’s how you can go about it:

  • Check your credit score: First up, take a look at your credit score. Since lenders use this to determine your loan eligibility and interest rates, you want it to be as high as possible. If it’s not where it should be, consider taking some time to improve it before applying for refinancing.
  • Gather your documents: You’ll need to prove your financial stability and reliability to lenders. This means gathering documents like your tax returns, proof of income, the original land contract, and records of your on-time payments under the land contract.
  • Get an appraisal: Lenders will want to know the current value of the property to determine how much they’re willing to lend you. An appraisal gives them, and you, an up-to-date valuation of the property.
  • Shop around for lenders: Not all lenders are created equal, especially when it comes to refinancing land contracts. Some may be more familiar with the process or offer better rates. Don’t hesitate to shop around and compare offers.
  • Apply for the mortgage: Once you’ve found a lender that meets your needs, it’s time to apply for the mortgage. This will involve filling out an application and providing all the necessary documentation. The lender will then process your application, which will include checking your credit, verifying your income, and appraising the property.
  • Close on the new mortgage: If your application is approved, you’ll move on to closing, which is when the land contract is officially paid off and replaced by the new mortgage. This will involve signing a lot of paperwork and possibly paying closing costs, which can sometimes be rolled into the new mortgage depending on the lender.

What is the difference between a land contract and a deed of trust?

The key difference between a land contract and a “deed of trust” or “trust deed” is the party holding the legal title. 

In a land contract, the seller retains the legal title, while in a “deed of trust,” a neutral third party (trustee) holds it on behalf of the seller as security for the loan. When the borrower repays the loan, the trustee releases the title to the borrower.

Land contract pros and cons

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


  • 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: You can work with buyers who may not qualify for traditional financing due to poor credit history or lack of a substantial 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.


  • 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.

What happens if the buyer defaults on a land contract?

Suppose a buyer defaults on a land contract. In that case, they may lose their equitable title, any equity they have built up through their installment payments, and the right to use and enjoy the property. 

Depending on the contract terms and the applicable state laws, the seller may have the right to terminate the contract and reclaim the property.

The specific process for handling a default can vary by state and contract terms. In some cases, the seller may be required to go through a foreclosure process similar to that of a traditional mortgage. In other instances, the seller may pursue a more streamlined process, such as forfeiture or eviction, to reclaim the property.

Given the potential risks and consequences associated with defaulting on a land contract, it is crucial for both buyers and sellers to clearly understand their rights and obligations before entering into an agreement.

How Does a Land Contract Work?

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. 

  • First, assess the value of your contract by considering factors such as the outstanding principal balance, interest rate, payment history, and property market value. 
  • Next, gather all relevant documents, including the original land contract, payment records, and property tax information.
  • Market your contract effectively by working with an experienced land contract buyer. You can also run advertisements on online platforms or real estate classifieds. 
  • Also, stay prepared and flexible to negotiate the sale terms while keeping your minimum acceptable offer in mind.
  • Finally, work with a real estate attorney or title company to prepare the necessary paperwork, coordinate the closing process, and maintain accurate transaction records for tax and legal purposes.

How much profit can you make from selling your land contract?

The profit you can make from selling your land contract depends on several factors, including the terms of the contract, the remaining balance, the interest rate compared to current market rates, the creditworthiness of the buyer, and the property’s value. 

Generally, sellers might sell a land contract for less than the remaining balance due to the discount rate applied by buyers to mitigate risks, such as default or early payoff. This discount rate varies based on the perceived risk and the current interest rate environment. If the property has appreciated in value since the inception of the land contract and the buyer has demonstrated reliability in payments, the note could be more attractive to investors, potentially reducing the discount rate and increasing the seller’s profit. 

Additionally, if the seller originally offered seller financing at an interest rate higher than the prevailing market rates, this could also lead to a smaller discount and higher profit. The exact profit will vary significantly from one transaction to another based on these and potentially other factors.

Steps that land contract buyers can take to protect themselves during negotiations

  • Research the property thoroughly: Before entering into negotiations, conduct a comprehensive review of the property. This includes checking for any liens, encumbrances, zoning issues, and ensuring that there are no environmental problems. It’s also wise to invest in a professional property inspection to uncover any potential issues that could affect the property’s value or your ability to use it as intended.
  • Verify seller ownership: Make sure the seller has clear and undisputed ownership of the property. Request to see proof of ownership and verify this information against public records. This step is crucial to ensure that the seller has the legal right to sell the property and that you are protected from potential ownership disputes after the purchase.
  • Establish a fair payment schedule: Work with the seller to agree on a payment schedule that is realistic based on your financial situation. It should allow you to make payments comfortably without overextending yourself financially. Consider your long-term financial stability and the likelihood of being able to refinance the property in the future when setting the terms.
  • Escrow property taxes and insurance: Rather than handling property tax and insurance payments on your own, consider setting up an escrow arrangement where these amounts are included in your monthly payments. This ensures that taxes and insurance are paid on time and helps protect your investment in the property.
  • Secure a right to prepay: Negotiate the inclusion of a prepayment clause that allows you to pay off the balance of the land contract early without incurring penalties. This flexibility can be valuable if your financial situation improves and you wish to clear the debt earlier than anticipated or if you decide to refinance under more favorable terms.

By taking these practical steps, buyers can enter into land contract negotiations with a solid foundation for protecting their interests and ensuring a smoother and more secure transaction.

Can a land contract affect the land contract buyer’s credit?

A land contract can affect the land contract buyer’s credit, but it largely depends on whether the contract payments are reported to credit bureaus. Typically, individual sellers under land contracts do not report payments to the credit bureaus, which means these transactions may not directly influence the buyer’s credit score. 

However, if the buyer or seller takes the initiative to report the payment history, such as through a third-party service that reports to credit bureaus, then timely payments can positively impact the buyer’s credit score, similar to traditional loan payments. On the flip side, missed or late payments reported in this manner can negatively affect the buyer’s credit. 

Furthermore, when a buyer seeks to refinance the land contract into a traditional mortgage, the lender may conduct a thorough review of the payment history as part of the underwriting process. This review, although not directly reported to credit bureaus, can indirectly influence the buyer’s creditworthiness in the eyes of potential lenders. 

Therefore, consistent, timely payments under a land contract can be beneficial to a buyer’s credit, provided there’s a mechanism in place for reporting those payments to credit bureaus.

Land contract alternatives

If you’re considering buying or selling property but a land contract doesn’t seem like the perfect fit, there are several other alternatives you might explore. Each option has its own set of advantages and conditions:

  • Traditional mortgage: The most common way to buy a home, with a bank or mortgage lender providing the funds, and the buyer repaying over a set period, typically 15 to 30 years. It’s ideal for buyers with good credit and stable income.
  • FHA loan: A loan insured by the Federal Housing Administration, offering lower down payments and more lenient credit requirements, making it accessible for first-time homebuyers or those with less-than-perfect credit.
  • VA loan: A mortgage option for veterans, active-duty service members, and select military spouses, backed by the Department of Veterans Affairs. VA loans offer benefits like no down payment and no private mortgage insurance (PMI).
  • USDA loan: Designed for rural homebuyers and offered by the United States Department of Agriculture. It provides low- to moderate-income buyers the opportunity to buy homes with no down payment.
  • Rent-to-own: This arrangement allows renters to buy the home they’re renting after a certain period, with a portion of their rent going toward the purchase price. It’s a good option if you’re not yet ready to secure financing.
  • Owner financing: Similar to a land contract, the property owner provides financing directly to the buyer, but in this case, the title often transfers to the buyer immediately. Terms are negotiable between the buyer and seller.
  • Lease option: The buyer leases the property with the option to buy it in the future at a predetermined price. It allows the buyer to lock in a purchase price and save for a down payment while living in the home.
  • Bridge loans: Short-term loans that help buyers purchase a new home before selling their existing one. These are useful for buyers who need to move quickly and plan to repay the loan with proceeds from selling their old home.
  • Hard money loans: Short-term, asset-based loans from private investors or companies. Interest rates are higher, but they can be an option for investors or buyers who plan to fix and flip a property or who cannot qualify for traditional financing.
  • Home equity loans or lines of credit: If you already own property, you might consider borrowing against the equity of your current home to finance the purchase of another. This can be a viable option if you have substantial equity and a good repayment plan.

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.


**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.**