Purchasing real estate through a land contract is fairly straightforward. The buyer gives the seller a deposit for the home or piece of land and the seller acts as the bank, financing the balance of the purchase price. The buyer and seller work together to negotiate an rate of interest at the time of purchase. Generally, the seller carries the loan for a determined number of years, at which time a balloon payment is due.
Pro: Financing
A land contract allows a buyer who’s unable to secure conventional financing to purchase real estate. The buyer has the time to work on almost any credit problems he can have, such as lowering his debt-to-income ratio, and also to save for the deposit on a conventional loan.
Pro: Win/Win For Seller
A land contract puts the vendor in a win/win place. He collects rent on the property for a fixed number of years and then sells it for a predetermined cost. In the event the buyer fails to make payments, the vendor can evict him, as he would another renter. In the event the buyer is unwilling or unable to make the balloon payment, the property still goes back to the vendor and he can do with it as he chooses.
Pro: A Sales Tool In A Tough Market
When interest rates are high and credit is tight, there are fewer buyers on the market. A land contract can draw in buyers who would not normally have been in a position to purchase property.
Con: Buyer Depends On Seller
Unless the vendor owns the property outright, he is still making payments to a lending establishment. If, for any reason, the vendor doesn’t make regular payments, the property could be foreclosed upon, leaving the buyer with a worthless contract and no home.
Con: Contract Mistakes
Land contract agreements must cover myriad problems, for example what happens when the market appreciates or depreciates dramatically before the due date of the balloon payment. Additionally, there are concerns as to which party is responsible for upkeep of the home, who’ll take the insurance to the home, and also what happens in case the buyer chooses not to purchase the property. Perhaps even more complicated than a normal home purchase, a land contract has special challenges, and careful consideration should go into creating the binding contract.
Con: The Buyer Could Feel Like The Owner
Land contracts exist in a grey area of home possession. A buyer moves in, presuming that the home is his and fully intending to purchase it. If he spends making adjustments that suit him, only to neglect to procure a loan when the balloon payment comes due, the seller is left with a modified home and little recourse. Like anything about a land contract, the issue of alterations to the home has to be agreed upon in advance so that the seller is not left with a home which he will need to make major repairs to so as to put back on the marketplace.
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