How Land Contracts Work and How You Can Use Them in Your Life
When someone hears the term “land contract,” we usually assume it’s something only real estate speculators know about. But a land contract, also known as a contract for deed or even an “installment sale agreement,” is actually a very simply contract to understand. In fact, many of us have probably used the same type of principle involved in a land contract to finance the purchase of an appliance from a retail store, or a piece of jewelry from a jeweler. How does that work? Keep on reading and you’ll see why a land contract might be an option for you. First, let’s take it from the buyer’s perspective. When you’re buying a piece of land or real estate in a “land contract,” you tend to assume that you’re going to have to take out a loan in order to finance the purchase. After all, it’s not as if you “buy” a piece of property by making payments on it every month. That sounds more like a renter’s agreement to me. Instead, you’re making payments on the loan that was used to finance the initial purchase of the property. That’s simple enough to understand. So what’s different in a land contract? Instead of getting the loan from a bank, you’re actually getting the loan from the person who’s selling the land! This is an interesting proposition because it means that both you and the seller have a vested interest in making sure that you’re capable of making all the payments on time. The seller has to be certain that you’re capable of paying off the loan as per the agreement, and you have to make sure that you’re capable as well. This skirts the typical method of acquiring real estate, which means going to the bank for a loan in order to finance a purchase. It also means there may be a higher degree of flexibility when it comes to a land agreement - for example, a seller will often be willing to take a lot of money upfront, or even modify payment terms, as long as they keep making money. A bank has a lot of loans out and is more focused on discipline and staying within the rules of the loan agreement. Of course, a seller also has a right to be hard on you if you’re not making payments on the land contract terms, and this will be as enforceable by law as any agreement, including a loan agreement with a bank. So while a land contract can be a great and convenient way to finance a purchase, don’t think that it means there is an infinite amount of flexibility and leeway when it comes to making payments. And sellers have to be careful, too, as they have to be sure they’re working with a trustworthy buyer who won’t “skip town” when the payments become too cumbersome.