What is a Land Contract and How Does it Work?

Jennifer Park
Published: February 16, 2019 | Updated: June 20, 2023

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 a 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 does a land contract work?

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.

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 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.

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.**