A Land Contract (also known as a Contract for Deed) is a type of Real Estate Purchase Agreement that allows a Buyer to purchase a property directly from a Seller by making some amount of down-payment then monthly payments over time.
There is no bank or mortgage company involved.
The sale price is typically paid in installments, often with a buyout or balloon payment due at the end.
When the full purchase price has been paid by the Buyer (including principal and interest amortized over a set time period), the Seller is obligated to convey legal title to the property to the Buyer.
An initial down payment from the buyer to the seller is usually also required, with the balance due financed just like that of a bank.
Who Uses a Land Contract?
Home Buyers who are in a financial position to afford the monthly payments but lack the large down payment necessary to qualify for financing might look for a Land Contract.
Likewise, a Buyer with a poor credit score who cannot obtaining traditional bank financing may desire a Land Contract, too.
Selling a home by way of a Land Contract can benefit the real estate owner, too.
Selling property through a Land Contract can provide a quicker and less expensive way for the property owner to sell the property, as the Seller does not need to comply with the guidelines of bank financing or pay the fees associated with loan closing costs.
Also, real property sold on a Land Contract can often be priced slightly higher than a sale done with bank financing. Since the Seller provides the financing and the buyer is not always required to come up with a large down-payment, a higher asking price can be had for the property.
And of course, the Seller also earns interest on the money he or she is ‘lending’ to the buyer, even though that loan is not a transfer of cash.
The terms of a Land Contract can be set at whatever the Buyer and Seller agree to (allowing for state law): the purchase price, the duration of the loan, the interest rate, the down payment amount, etc.