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Guide To Understanding
Land Contracts

Land contract (a.k.a. contract for deed or "installment sale agreement") is a contract between the owner of the real property (called the "vendor" or the "seller") and a person who wants to buy the property (the "vendee", "contract purchaser", "purchaser" or "buyer")for an agreed-upon purchase price. Under a land contract the vendor grants equitable title to the vendee (which consists of virtually all rights to the property other than actual legal title), and the vendee agrees to pay the purchase price to the vendor over time, usually in monthly installments, by a certain date. When the full amount of the purchase price is paid, the vendor is obligated to deliver legal title to the vendee by an actual deed, and upon delivery of the deed, the vendee owns equitable and legal title to the property.

Equitable title, for all intents and purposes, makes the purchaser the "owner" of the property. There are several "land contract friendly" states in the US, while other states make it extremely difficult to sell or purchase real property by means of a land contract.

It is common for the installment payments of the purchase price to be similar to mortgage payments in amount and effect. The amount is often determined according to a mortgage amortization schedule. In effect, each installment payment is partially payment of the purchase price and partially payment of interest on the unpaid purchase price. This is similar to mortgage payments which are part repayment of the principal amount of the mortgage loan and part interest. However, since land contracts can easily be written or modified by any seller or purchaser, you may come across any variety of repayment plans. Interest only, negative amortizations, short balloons, extremely long amortizations just to name a few. It is therefore even more so advisable to read your contracts and consult professionals. Typical land contracts are easy to understand and usually only make up 3-5 pages. It is not uncommon for land contracts to go UNrecorded. For several reasons the vendor or vendee may decide that the contract is not to be recorded in the register of deeds. This does not make the contract invalid, but it does increase exposure to undesirable side effects. Contrary to common belief, a contract is valid with only a vendors' signature, provided it is delivered and accepted by the vendee. Contracts without the vendee's signature, or without being notarized - although not recommended- are therefore still valid and enforceable in court.

Although land contracts can be used for a variety of reasons, their most common use is as a form of short-term seller financing. Usually, but not always, the date on which the full amount of the purchase price is due will be years sooner than when the purchase price would be paid in full according to the amortization schedule. This results in the final payment being a large "balloon" payment. Since the amount of the final payment is so large, the buyer usually obtains a conventional mortgage loan from a bank to make the final payment. Land contracts are sometimes used by buyers who do not qualify for conventional mortgage loans offered by traditional lending institutional, for reasons of poor credit or an insufficient down payment. Land contracts are also used when the seller is anxious to sell and the buyer is not given enough time to arrange for conventional financing. Besides the obvious reasons, land contracts are a favorite amongst many real estate investors because of their ease of use, extreme flexibility, and fast executions.


 
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