Real Estate News

A land contract (sometimes known as a “contract for deed” or an “installment sale agreement”) is a contract between a seller and buyer of real property.  Real property is the land and all the things that are attached to it.  Real property may also be determined to include whatever is beneath the surface of the land, like minerals, natural gas, and old; also any rights to the use of the property and finally leasehold improvements (since they cannot be removed.)

Leasehold improvements (sometimes referred to as “build-outs”) are the structural changes you make to leased space to make it suitable for your business needs; for example, lighting changes, a reception area, offices, dressing rooms, and other special rooms or partitions as well as paint and carpeting/flooring.  Real property is distinguished from personal property, which is other property owned by a business or individual, including equipment, furniture and fixtures.

With a land contract the seller provides financing to buy the property for an agreed-upon purchase price and the buyer repays the loan in installments.  Under a land contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it.  Most experts agree that anyone pursuing this option should retain a real estate attorney to draw up the land contract.  This is because too often the loopholes and other complications that arise can make the land contract very confusing for all concerned and knowing the advantages and disadvantages of the land contract are important before handing over any money.  It is a misconception that sellers and buyers in a land contract do not agree on terms in advance.

It is important to look at your state law concerning land contracts as each state has its own set of rules for example does the execution of the contract have to go before a judge or a notary public?  And what are the laws when the contract is executed in another state or foreign country?

Although land contracts can be used for a variety of reasons, their most common use is as a form of short-term seller financing.  Usually, but not always, the date on which the full amount of the purchase price is due will be years sooner than when the purchase price would be paid in full according to the amortization schedule.  This results in the final payment being a large balloon payment.  Since the amount of the final payment is so large, the buyer may obtain a conventional mortgage loan from a bank to make the final payment.

There can be other advantages of using a land contract too. When a third party lender, such as a financial institution, provides a loan, this third party has its own interests to protect against the other two parties involved, the seller and buyer. Establishing the correct title and value of the property to be used as collateral is important to the lender.  Thus, the lender commonly requires title service including title search and title insurance by an independent title company, appraisal  and termite inspection of the property to ensure it has sufficient value, a land survey  to ensure there are no encroachments, and use of lawyers to ensure the closing is done correctly. These third party lender requirements add to closing costs which the lender requires the seller and/or buyer to pay.  When third party lenders are involved, typically a lien called a mortgage is placed on the property so that the value of the property is used as collateral until the loan is paid in full.

If the seller is also the lender, these costs are usually not required by the seller and may result in closing cost savings and fewer complications. It may also be the seller’s position that if the buyer requires any of these services, they could pay for the costs and make arrangements themselves. For properties where only relatively undeveloped land is involved and if the seller is willing to finance, the price of the empty land may be so low that the conventional closing costs are not worthwhile and can be an impediment to a quick, simple sale. Easy financing and a simple sale transaction may be a good selling point for a seller to offer a buyer.

Since a land contract specifies the sale of a specific item of real estate between a seller and buyer, a land contract can be considered a special type of real estate contract. In the usual, more conventional real estate contracts, a seller does not provide a loan to the buyer.

Land contracts can easily be written or modified by any seller or buyer; one may come across any variety of repayment plans. Interest only, negative amortizations, short balloons, extremely long amortizations just to name a few. Typical land contracts are easy to understand and usually only make up 3-5 pages. If you choose to not retain a real estate attorney, there are online companies that sell ready-made land contracts.

Finally it is not uncommon for land contracts to go unrecorded.  For several reasons, the buyer or seller may decide that the contract is not to be recorded in the register of deeds. This does not make the contract invalid.

http://en.wikipedia.org/wiki/Real_property

http://en.wikipedia.org/wiki/Talk:Land_contract

http://en.wikipedia.org/wiki/Land_contract#Reasons_for_a_land_contract

http://biztaxlaw.about.com/od/glossaryr/g/realproperty.htm

http://biztaxlaw.about.com/od/glossaryl/a/leaseholdimprov.htm