The Basics of Land Contracts

A traditional land contract is a written legal contract, or agreement, used to purchase real estate, and not just bare land! It can be used for vacant land, a house, an apartment building, a commercial building, or other real property. It's a form of seller financing that's similar to a mortgage. Rather than borrowing money from an institutional lender or bank, however, the buyer agrees to make payments to the real estate owner or seller until the purchase price is paid in full and the buyer takes full ownership.

A buyer and a seller both sign the land contract, which will cover agreed-upon terms and conditions of the sale. After signing, the buyer can move in (take possession). The buyer will then need to make regular repayments of the purchase price over a specified time period. Only upon satisfaction of all contract terms and conditions will the legal title of the property transfer from the seller to the buyer by way of a warranty deed or other deed used to convey title.

This article discusses the basics of a land contract including pros and cons and how and when they're used to purchase real property. (Note that you might see various other names for land contracts, including contracts for deed, installment land contracts, land sale contracts, memorandums of contract, real estate contracts, or bonds for title.)

What Are the Advantages to Land Contracts?

Here are the positive aspects of land contract financing arrangements.

Benefits to Property Buyers Who Sign Land Contracts

Land-contract financing can help a prospective buyer of real estate for sale who, because of negative marks on their credit history or other reasons, cannot obtain approval for a needed mortgage from a traditional lender. By entering into a sale by land contract, the buyer can get on the path to real estate ownership, negotiating with and making monthly payments directly to the seller. If they run into financial trouble and have to delay a payment, a land-contract seller might be more flexible than a bank would be.

Benefits to Property Sellers Who Offer Land Contracts

Although the seller will not receive the full purchase price up front like they would had the buyer used a mortgage or paid all cash, openness to a land contract arrangement can give the seller more options for potential buyers. Also, the seller might be able to negotiate a higher purchase price on the property by offering a sale by land contract. The property seller can also require and receive a large cash down payment.

What Are the Disadvantages to Land Contracts?

Here are the problematic aspects of land contracts.

Issues for Property Buyers Who Sign Land Contracts

Even after a deal is signed, the buyers can't yet call themselves "property owners." Legal title to the property remains with the seller until the buyer makes the final payment. Only when that final payment is made, and all other conditions of the land contract are met, will the deed to the property be filed with the appropriate government office (such as the county register of deeds), naming the buyer as the property's new owner.

In the meantime, while making payments to the seller, the buyer is considered to have "equitable title" to the property. That means the buyer has an interest in the land contract property and the seller is precluded from selling it to a third party or subjecting the property to a lien or encumbrance that would interfere with the buyer's interest in it. But the buyer can also forfeit everything if they fail to make their contractually required repayments, as described next.

Issues for Property Sellers for Who Offer Land Contracts

The seller takes a risk selling by land contract, because they don't receive the full purchase price at the time of sale. They have to hope that a buyer whose financial position might not have been strong in the first place is able to make continued regular (likely monthly) payments.

If the buyer defaults or fails to make the monthly payments to the seller as required, the seller will need to file a court action called "land contract forfeiture." Success in court will result in the buyer "forfeiting," or giving up, all money paid to the seller for the property pursuant to the land contract. What's more, the equitable title of the buyer will be extinguished. In other words, if the buyer fails to pay, the seller keeps all money received plus the real estate itself.

To learn about the process for purchasing real estate using a land contract see How to Close on a Land Contract.

Does an Attorney Need to Review a Land Contract?

Real estate rules vary by state, so it is important for both seller and buyer to consult with an experienced real estate attorney about the proposed land contract arrangement. The attorney(s) will draft a land contract that details all appropriate terms, such as purchase price, interest rate, down payment amount, repayment schedule, consequences of buyer default, seller's ability to enforce a forfeiture action if needed, and so on.

Other Resources on Real Estate Contracts and Financing

For more advice on real estate financial matters, contracts, and related 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, J.D., and Attorney Ann O'Connell.