A land contract, known also as a contract for deed, is a binding
contract drawn up between you and the would-be buyer. The document
sets out all the normal provisions for a sale, with one exception:
the buyer will not actually receive title to the property until all
(or in some cases, a large part) of the purchase price has been paid.
Until that time, the buyer takes responsibility for the property
and treats it as their own, meeting all expenses.
Various provisions can be added to the contract to suit the needs of the parties.
What happens if the buyers can't complete the purchase? The answer lies in
the provisions of the contract, or in state law. In most areas, the buyer
has the right to sell the remaining contract to another purchaser, subject
to your approval.
Quite different is a lease-option, sometimes called "rent-to-buy".
While provisions can vary widely, a typical contract might require the buyer
to pay, say, a few thousand dollars for an option to buy the property at a
given price within, perhaps, a couple of years. Meanwhile, the buyer moves
in as a tenant.
If the tenant chooses to buy, the deposit and, sometimes, part of the rent
may be credited toward down payment.
The tenant may, however, decide not to buy and simply to remain as a tenant
for the term of the lease. The deposit is typically non-refundable in that
case.
Some owners look upon these resources as excellent ways to help marginal buyers
without taking too much risk. Others hold that few such contracts actually
end up in sales, and that the plans simply bring them good tenants who take
care of the property as if it were their own.
Land contracts vary widely from transaction to transaction.
In most cases, no grant deed is recorded. The buyer rarely obtains a new mortgage loan at the time of purchase. Instead, the new owner makes payments to an intermediary, who then makes payments on the seller’s mortgage, which is still in place.
Keep in mind that such an agreement usually violates the lender's guidelines. If the lender becomes aware of a transfer of title on the property (which is why you usually don't record the grant deed), they can exercise the "due on sale" clause of the note. This would require you to refinance the loan or sell the property. Since many who buy on land contracts have problems qualifying for a mortgage, you can see how this can lead to problems.
At the same time, lenders generally only check for transfers of title if the loan becomes delinquent.
Within a certain number of years, it is expected the buyer will be able to qualify for a loan. At that time, they will obtain a new mortgage and pay off whatever amount the land contract requires. Then a grant deed is recorded and full ownership is conveyed.
Contracts for Deed are used as a form of owner financing of real estate. An owner and a buyer enter into a contract in which the owner agrees to give the buyer a deed after the buyer pays the owner a certain amount of money. Usually the contract requires the buyer to make payments over time with interest payable on the unpaid balance. After the buyer pays all of the payments called for under the contract, the owner gives the buyer a deed to the property. During the term of the contract for deed, the buyer is entitled to possession of the real estate and may be required to keep the property insured and pay the real estate taxes, or reimburse the Seller for same.
Advantages:
Disadvantages:
Q: Must a contract for deed be in writing?
A: Yes. All states require that
a contract concerning real estate, like a contract for deed, must
be in writing.
Q: What is the difference in a contract
for deed, land contract and an agreement for deed?
A: These are just different ways of describing the
same thing. In some states the term " land contract" is
more common than the term "contract for deed" and in other States
they may be called an "agreement for deed". You may also
see the term " land installment contract".
Q: Does the contract have to be recorded?
A: This depends on your State. In
all States a contract for deed may be recorded to evidence the
agreement. However, sometimes the parties do not want the
terms of their agreement disclosed and therefore do not record
the contract.
Q: When will the buyer receive a deed to
the property?
A: Generally, when the money due under
the terms of the contract are paid.
