THE FINE PRINT ? What is a land contract? : The Bay View Compass

April 1, 2013

By Jan Pierce

A land contract is an alternate method for financing the purchase of real estate. It is an agreement that transfers most, but not all, of the rights of ownership upon executing the contract. It?s sort of like buying a property on layaway. The buyer enjoys most of the rights and responsibilities of ownership, including the requirement to pay for homeowner?s insurance and property tax. The seller retains the deed until all the payments are made. After the final payment is made, full legal title is transferred to the buyer when the seller signs over the deed.

Land contracts become more popular when interest rates are high or when qualifying for credit is difficult. The latter is true for many in the wake of the recession due to more stringent lending standards. Additionally, there is a large inventory of hard-to-move real estate on the market, so the conditions are favorable for land-contract transactions.

A land contract option is attractive to a seller who is unable to get the full purchase price up front, or who is willing to take payments over time. In a land contract, the seller is acting like a bank, by financing the purchase to a buyer who may not be able to get a loan from a bank. However, if the seller were truly acting like a bank, the contract would be structured like a traditional real estate transaction: Full legal title would be transferred at the closing, with the seller lending the money for the full amount of the purchase price and securing the loan with a mortgage.

Liabilities

Because full legal title does not transfer until the property is paid in full, which could take years, the buyer may be exposed to risk during the life of the land contract. For example, the buyer could lose the investment if the seller defaulted on the mortgage that encumbered the property and it is taken by foreclosure. An astute buyer will make sure the property is unencumbered before signing a land contract.

The other major risk for the buyer is the possibility that the deed owner might sell the property to someone else, or encumber the property with another mortgage. While it would be wrong for a seller to do this this, the buyer should record the land contract with the Register of Deeds, just like any other real estate transaction, to protect their investment. Recording the land contract puts third parties on notice that someone else already owns the property, which is exactly what happens when a deed gets recorded.

The benefit of a land contract to the seller is that it can help move a piece of property in a difficult market. The benefit to the buyer is that they can buy a piece of property that they may otherwise not qualify for with traditional financing.

Often land contracts have a five or 10-year term, with a balloon payment due at the end of the term. By that time, the buyer has acquired significant equity in the property, making it much easier to get financing. In addition, the buyer?s personal creditworthiness may have improved.

Send your question to?jan@janpiercelaw.com.

To protect your privacy, your name will not be published. Jan Pierce, S.C. is a law firm In Milwaukee. The firm?s emphasis is on assisting small businesses and social entrepreneurs in all aspects of launching and managing their ventures.

Disclaimer: Advice in this column is general legal information and does not constitute, nor is it intended to be, legal advice.

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Source: http://bayviewcompass.com/archives/13571

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