Land contracts are becoming very popular in the present real estate market.  Due to lender financing constraints, Land contracts are the way buyers and sellers get rid of lending institutions altogether. Land Contracts were very popular in the late 1970s and early 1980s. Back then, installment sale contracts, sometimes called contracts for deed, offered more attractive financing terms over the higher rates and rigid qualification standards of institutional lenders.

Land contracts began to disappear when loan requirements softened and rates dropped below 8%. But they have not vanished all together and, in fact, tiptoed back into the market in 2006.

What is an Installment Sale Land Contract?

• Land contracts or contracts for deed are a security agreement between a seller, called a Vendor, and a buyer, called a Vendee.
• The Vendor agrees to sell a property by financing the purchase for the Vendee.
• The Vendor retains legal title and the Vendee receives equitable title.
• The owner-carried financing can include an existing mortgage balance or the property can be free and clear.
• Upon payment in full, the Vendor hands the Vendee a deed to the property.

All-Inclusive (Wrap-Around) Land Contracts

• Wrap-around contracts contain an existing mortgage.
• The Vendee makes one payment to the Vendor.
• Upon receipt of the payment, the Vendor pays the underlying lender’s payment and keeps the rest.
• If the existing mortgage has a lower interest rate than the rate on the contract, the Vendor earns extra interest on money that does not belong to the Vendor.

This is how it works.

1. Say the sales price is $100,000.
2. The Vendee puts down $10,000.
3. The Vendee agrees to make payments on $90,000, bearing interest at 6.5%, payable $567.
4. The existing underlying loan is $50,000, payable at 5% interest with a payment of $268.
5. The Vendor earns 6.5% interest on $40,000 of equity, PLUS 1.5% interest on the existing mortgage of $50,000 and pockets $299 a month.

Straight Contracts

There is no override of interest in a straight contract. The Vendee can agree to pay the existing lender directly and make another payment to the Vendor, or the Vendee can send one payment to the Vendor, and the Vendor will disburse payment to the underlying lender. Let’s look at the previous example on a straight contract:

1. Sales price of $100,000.
2. Vendee puts down $10,000.
3. Vendee makes one payment of $268 on the existing loan balance of $50,000, bearing interest at 5%.
4. Vendee makes a second payment to Vendor on $40,000 owner-carried financing, bearing interest at 6.5% and payable at $253 per month.
5. Total of both payments is $521, which saves the Vendee $46 per month over the wrap-around.

Land Contract Power of Sale

• Some title companies draft and insure land contracts that contain a Vendor, a Vendee and a Trustee.
• Like a trustor in a trust deed, the Vendor and Vendee assign right, title and interest to the trustee for the purpose of securing the Vendor’s and Vendee’s obligations.
• In the event the Vendee stops making payments, the Trustee has the power to foreclose under the power of sale.
• The process of filing a notice of default varies from state to state.

Acceleration Clauses in Underlying Loans

All loans today contain acceleration and alienation clauses. Lenders have had a long history of calling loans immediately due and payable if buyers took title “subject to” to the existing loans. That’s b

ecause lenders wanted the buyers to qualify, pay loan points and higher interest rates.

Sue Heimbichner, an escrow officer at Chicago Title in Sacramento, has been in the business since 1976 and has watched the popularity of land contracts come and go. One of the biggest lawsuits from that period evolved from buyers taking title subject to existing mortgages held by federal savings and loan associations. Congress passed the Depository Institutions Act of 1982, effectively wiping out the ability to take over existing loans.

Heimbichner says lenders today tend to look the other way. “Some lenders are glad to have their payments made,” she said. But don’t try to take over government-backed loans. “You don’t want to mess with the government,” Heimbichner warns, “because you’re going to get slapped.” If your land contract contains an existing mortgage, you should seek the advice of a real estate lawyer.

Download a Do-it-yourself Land Contract

Land Contract Vendee’s Bundle of Rights

For all practical purposes, the Vendee owns the property and has the right of:

• Possession.
• Quiet enjoyment and use of the property.
• Exclusion, forcing others to leave the premises.
• Resale.

Benefits to the Vendee

• No qualifying, although the Vendor could ask for a copy of the buyer’s credit report.
• Down payment flexibility. The amount is negotiable.
• Length of land contract term, interest rate and payments are negotiable.
• Low closing costs. There are no lender fees to pay.
• Fast closing. Transactions can close in 7 days or less.

Benefits to the Vendor

• Typically higher sales price and no appraisal. Although buyers are advised to obtain an appraisal.
• If taxable, possibly can qualify for deferred gain.
• Monthly income.
• Often a better rate of return than money market accounts.
• If property is non-conforming, it’s an easy way to sell.
• Fast closing.

Land Contract Buyer Tips

• Get an appraisal.
• Obtain title insurance.
• Engage the services of a holding company to retain possession of an executed deed and the original documents.
• Talk to a real estate lawyer.

Land Contract Seller Tips

• Pull the buyer’s credit report.
• Include both Vendor and Vendee names on the existing insurance policy.
• Hire a disbursement company to handle contract collection.
• Talk to a real estate lawyer.

This Article was written by By Elizabeth Weintraub

Land Contracts and the Installment Sale mean the same thing. They are owner financed methods of selling a property. There are many benefits for doing an owner-carry land contract or installment sale as opposed to conventional financing for both the buyer and seller. Sometimes the advantages side to the benefit of one or the other, but in most cases the transaction is “Win/Win” for both parties. I sell most of my properties by using a land contract. One of the best places to get your own contract for deed or land contract forms with state specific addendum’s is the Save money on Contract for Deed

Land Contract Benefits for the Seller

Most sellers of real property insist on the highest price and all cash. Sellers want a fast closing with little hassle. Sellers also want to pay as little taxes as possible on the gains incurred. In many cases, the seller can have most of his needs satisfied by an installment sale rather than a traditional cash sale. Let’s look at these needs one by one.

1. Highest Price. There is no doubt that a seller can insist on and receive the highest price when offering flexible owner-finance terms. In many cases, the seller can receive more than the fair market value of the property by offering these “soft” terms. People are always willing to pay a premium for non-qualifying financing.

2. Cash. Nearly ever seller says he wants all cash, but few need it. What the typical seller wants is the most net cash from the deal. Often, the seller has to pay closing costs, title insurance, broker fees and the balance of the existing financing. In addition, there may be capital gains tax due to Uncle Sam. In many cases, the sale of a property by an installment sale (particularly a “wraparound”) will net the seller more future yield than any source from which the cash proceeds were reinvested.

3. Fast Closing. Nothing holds up a sale more than new lender financing. In some areas of the country, it can take months for a buyer to qualify and close a new loan to purchase your property. Since most standard real estate contracts contain a financing contingency, you may end up back at square one if your buyer does not qualify. Furthermore, if your house is not particularly nice or unique, it may take you some time to even find an interested buyer. Since you are competing with all of the other houses for sale, you may need to spend thousands of dollars in paint, new carpet and landscaping just getting the house ready for the market.

There are very few “assumable” loans and few sellers are offering “soft terms.” Thus, an owner-carry sale makes your house unique. Furthermore, an owner-carry transaction can be consummated in a matter of days, since there is no appraisal, underwriting, survey or other nonsense involved. In many cases, you will be able to sell the property yourself, saving thousands in real estate broker’s fees.

4. Tax Savings. On an installment sale, so you only pay gains to the extent you receive payments each year. This can be particularly advantageous if you have owned the property for several years. Furthermore, you can combine the installment sale with an I.R.C. §1031 Tax-Deferred Exchange for further savings.

As you can see, the installment sale provides many advantages to the seller of real property. Let us now turn to the advantages for the buyer.

Land Contract Advantages for the Buyer

1. Easy Qualification. The buyer, in many cases, prefers an installment sale to conventional financing because it does not require traditional bank income and credit approval. The buyer may have poor credit because of a divorce or recent bankruptcy. He may be self-employed and cannot prove income. He may be new to his job and cannot meet strict lender guidelines. Even if he could qualify for a loan, the rate will be astronomical if he has poor credit. Furthermore, few conventional lenders offer fixed interest rate loans to people with a poor credit rating.
As you can see, there are dozens of reasons why a buyer cannot (or will not) qualify for a conventional bank loan. The installment sale becomes the perfect solution for him.
2. Credit Rating. An installment sale may give the buyer a chance to improve his credit rating by owning a home and making payments timely.
3. No Loan Costs. One of the biggest benefits for the buyer is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and the plethora of other “junk” fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale.
4. Fast Closing. A buyer can close and move into a property within days, since there is no third party lender holding up the transaction.
Despite the elevated purchase price and interest rate, there are many benefits to a buyer who engages in an Land Contract or installment sale transaction.
Article written by William “Bill” Bronchick