A land contract is used where the seller finances the buyer’s purchase of the property. Rather than paying the entire purchase price at closing, the buyer pays the seller in installments and receives a deed when all the payments are made. Often a land contract will have a short term and involve a lump sum (balloon) payment of the balance when the buyer’s equity will allow mortgage financing of the property.
For the buyer, the land contract may be the only financing available depending upon economic conditions, the type of property, or the buyer’s creditworthiness. It may have a smaller down payment, fewer closing costs, and even a lower interest rate than a mortgage.
For the seller, land contract financing may be the only way to put the sale together. It allows a deferral of capital gains over the term of the land contract payments. Enforcement of a land contract is somewhat easier than a mortgage, but the seller assumes the risk that he will have to retake the property and resell it. The land contract also means that the seller does not get all of the sales proceeds on closing.
Land contracts are flexible financing instruments that involve detailed negotiation. The parties need good legal advice to assure that the land contract reflects their agreements and that their interests are protected. An experienced real estate attorney is invaluable to properly completing such a transaction.