A land contract is a written legal contract, or agreement, used to purchase real estate such as vacant land, a house, an apartment building, a commercial building, or other real property. A land contract is a form of seller financing. It is similar to a mortgage, but rather than borrowing money from an institutional lender or bank, the buyer agrees to take ownership of the property and then make payments to the real estate owner or seller until the purchase price is paid in full.
A buyer and a seller both sign the land contract, which will cover agreed-upon terms and conditions of the sale. Upon satisfaction of all contract terms and conditions, including payment of the purchase price over a specified time period, the legal title of the property transfers 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 contracts including how and when they are used to purchase real property.
As with other types of seller financing, a land contract can be advantageous to both buyer and seller.
Benefits to buyers. There might be a buyer interested in the real estate for sale who, because of their credit history or other reasons, cannot obtain approval for a needed mortgage from a traditional lender. The parties can enter into a sale by land contract so that the buyer makes monthly payments directly to the seller.
Benefits to sellers. Although the seller does not receive the full purchase price up front like the seller would if the buyer used a mortgage or paid all cash, the seller might thus have 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 seller can also require and receive a large cash down payment.
While making payments to the seller, the buyer is considered to have an "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.
The "legal title" to the property remains with the seller until the buyer makes the final payment. When the final payment is made, and all conditions of the land contract are met, the deed to the property will be filed with the appropriate government office, such as the county register of deeds, naming the buyer as the new owner of the property.
If the buyer defaults on the land contract, or fails to make the monthly payments to the seller as required, the seller can 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.
The seller takes a risk selling by land contract because the seller does not receive the full purchase price at the time of sale, but a forfeiture right protects the seller from a buyer who fails to pay, allowing the seller keep payments and a usually large down payment while retaining the property to offer for sale to someone else.
To learn about the process for purchasing real estate using a land contract see the Nolo article, How to Close on a Land Contract.
Land contracts can be a good, or sometimes the only, option available to buyers and sellers of real estate. Real estate rules vary by state, so it is important to consult with an experienced real estate attorney to draft a land contract in order to allow for appropriate terms and to be able to enforce a forfeiture action, if needed by the seller.
Also, for a comprehensive guide to buying real estate, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart.