Third Party Land Contracts and Home Buying: An Overview

November 21, 2016

land contractSome residential properties are subject to contracts that permit a business to use a parcel of the property for a specific purpose. Homebuyers must honor the contract until it expires, or one of the parties abandons the agreement based on a contractual provision.

The term “land contract” is also used to refer to a mortgage that results from seller financing, but the type of land contract sale described above — also known as a “land lease agreement” — is the kind of contract we focus on in this entry.

Examples of Land Contracts

rural landscapeLand can be contracted for almost any purpose, as long as no legalities get in the way. For example, a property may have crop fields that a farmer is under contract to farm, a cellular service provider may be contracted to use part of a property for a cellphone tower, or an oil company could have a contract for removing raw petroleum from a piece of land.

If you buy home that’s subject to a land contract, you have two ways to profit from the contact: Keep it, and earn monthly income, or opt for a land contract sale, and sell the contract to a buyer of land contracts for a lump sum.         

Which is the best option? It depends on your financial plans, and how you feel about another party having access to your property. With this in mind, let’s look at the benefits of keeping a land contact versus doing a land contract sale.

Benefits of Keeping the Contract

For most people, the biggest benefit of retaining the contact is monthly income earned from the land lease. Some types of land contracts are short-term, but others can last for decades. For example, if your property is a key location for a cellular service provider to expand or improve services, the lease could easily last 10 years. If the property has a sizeable oil or mineral reserve, a contract to extract the resources could last even longer.      

Keeping a land contract can also be beneficial for selling your home. Some homebuyers dislike the idea of not having total control over their property at all times, while others see a land contract as something that makes the property more affordable when monthly payments or a land contract sale is figured into the equation. These homebuyers have an added incentive to make a competitive offer for your residence: The land has a steady source of income. 

cell towerBenefits of Selling the Contract

Selling the contract instead of keeping it also has a big financial benefit: You receive a lump sum payment from the contact buyer. Because the contract is conducted as a non-recourse transaction, you get to keep the money, regardless of how the contact performs after the sale.

This brings us to another benefit of selling the contract: You needn’t worry about market conditions devaluing the contract due to clauses the tenant can use to negotiate a lower lease rate based on fair market value. With a land contract sale, you know exactly how much you’ll earn. This isn’t always the case when you retain a contract.       

Terms and conditions that strongly favor the tenant is another reason to sell a land contract. For example, if the contract is long-term and doesn’t have an escalation clause that lets you increase rent to offset inflation, the future value of the contract could be seriously affected. Although, early exit clause that lets the tenant exit the lease on short notice (e.g., less than three months) is another example of terms and conditions that make retaining a contract less appealing to sellers.

Interested in Selling a Contract?

If you buy property that’s contracted to a third party uses for business purposes, and you would rather sell the contract than keep it, we recommend contacting an experienced land contract buyer that purchases the specific type of contract you’d like to sell.     

If a situation ever arises where you would like to fully or partially sell the mortgage note for the property, we may be interested in buying it. To find out, call us at (800) 698-3650, or email us through our contact form for more information.