How to Close on a Land Contract

As with other real estate transactions, seller-financed land contracts require what's called a "closing" to prepare, sign, and file all necessary legal documents. This article discusses the common steps a buyer and seller should take to close on a land contract purchase, including:

• drafting the purchase agreement
• agreeing upon and signing the land contract
• filing a memorandum of land contract with the appropriate public records office
• preparing related paperwork such as a transfer affidavit
• drafting the title deed
• preparing the closing statement, and
• arranging for title insurance to protect the buyer's right to ownership.

For information on land contracts in general, see The Basics of Land Contracts. And for a variety of useful articles on real estate closings, see Escrow and Closing in Nolo's Real Estate section.

Make a Real Estate Purchase Agreement

Just like any sale of real estate, a land contract should begin with a purchase agreement. This is a legal document signed by a potential buyer making an offer on the real property for sale. The purchase agreement should indicate that the offer is for a land contract, and should state the purchase price, initial cash down payment, length of the payment term, and any other terms of sale.

A seller who accepts the terms of the buyer's purchase offer should sign the offer making it an official purchase agreement. The seller may be required by law to provide certain disclosures such as of any known defects of the property, including the existence of any lead-based paint. Required real estate disclosures vary by state, and a real estate professional or attorney might be able to assist sellers with these forms.

Sign a Land Contract

The land contract is its own legal agreement or contract, with all the terms and conditions agreed to between the buyer and seller. At a minimum, a land contract should list:

• the address of the real estate
• full legal description of the property
• purchase price
• down payment amount
• monthly payment amounts and term
• number of payments to be made, and
• any balloon payment required.

Attaching an amortization schedule to show the exact payoff schedule of applying the monthly payments to the total purchase price is helpful, too.

The land contract should also state how the payments are to be made, including the due date, any grace periods for late payments, late payment fees, and where the buyer should deliver each payment. Typically, the land contract buyer will be treated just like the property owner and thus will be responsible for the taxes on the property, the insurance, and any utility bills including water and sewer which are typically billed directly to the property.

File a Memorandum of Land Contract With the City or County

The memorandum of land contract is an abbreviated legal document referencing the land contract itself. This memorandum serves to put the public on notice of the buyer's interest in the real property without the parties having to publicly disclose and record the full land contract and all of its terms, including price. Since the deed to the property is not filed until the seller receives payment in full of the purchase price indicated in the land contract, this memorandum is filed with the city and county to record the buyer's interest in the property. The memorandum should list the address and legal description of the property as well as the names of the buyer and seller, and the date of the land contract. This document should be notarized and signed by the seller.

Prepare Other Forms to Transfer Rights in the Property Under a Land Contract

Depending on the state in which the property subject to the land contract sale exists, the buyer will want to file additional forms to gain the benefits of being the property owner, even though technically, the buyer does not have a true legal title to the property until full payment of the purchase price is made. Such forms may be a property transfer affidavit, which you might be required to file with the city assessor's office for tax purposes, or a principal residence exemption, which gives the buyer a tax break for using the property as the buyer's main residence.

Draft the Deed

A deed to transfer the legal title of the property from the seller to the buyer should be drafted and signed by the seller at the closing. This deed will be held in escrow until the final payment is made on the land contract and then filed with the appropriate government agency, such as the county clerk in the county where the property is located. Held in escrow means that the deed is held until a triggering event, payment of the land contract. A title agency, an attorney, or a financial institution may hold the deed in escrow for the buyer and seller.

Prepare the Closing Statement

A closing statement should be prepared to show an accounting of the debits and credits to each the buyer and to the seller as part of the land contract transaction. An attorney or a title agency can prepare a closing statement for the parties. The closing statement may also contain an amortization schedule showing the projected payments to be made from buyer to seller to fulfill the financial obligation of the land contract.

Arrange Title Insurance

The buyer might want to pay to have a policy of title insurance issued on the property subject to the land contract. The buyer can hire a title agency to run a land record search and discover any potential interests attached to the property that may interfere with buyer obtaining a clean title from seller. The parties can agree to split this cost in the land contract agreement.

An attorney's office or a title company can prepare closing documents for a land contract sale, but only the parties themselves or an attorney can prepare the actual land contract document and land contract memorandum. It is important to keep copies of all documents involved in closing on a land contract to verify required filings are performed and to protect each party's interests in the sale.

More Help with Land Contracts

Real estate rules vary by state, so it is important to consult with a real estate attorney if you are buying a selling property with a land contract. Also, be sure any real estate broker involved in the transaction is familiar with land contracts.

For more advice on real estate legal and financial issues, see the Buying a House and Selling a House articles in the Nolo Real Estate section.

Also, for a comprehensive guide to buying real estate, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray and Ann O'Connell.