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

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What is a Land Contract

A land contract is a written agreement between a person who has sold property (”the Seller or Vendor”) and the person who bought that property (”the Purchaser or Vendee”).

Click Here For Do-it-yourself Contract for Deed

Most of the time when a Seller finds a Purchaser for their property, they will probably prefer a cash sale. However, selling the property on a Land Contract provides a quick and inexpensive way to sell the property without the rigid guidelines, hassles and delays of bank financing. The contract also provides the Seller with monthly income and a good rate of interest, while using the property as collateral.

Land contracts are a sensible way to sell property and are extremely common all over the United States. In some states, they are called Trust Deeds, Contract for Deed, Deeds of Trust, Notes, or (privately held) Mortgages, but they all represent the same thing: a way of selling property where the Purchaser borrows from the Seller rather than paying cash up front or borrowing from a bank.

Although land contracts are relatively simple documents, we suggest that you have a legal professional or Title Company prepare them for you. Each state has its own laws and intricacies that need to be included in your contract.

Main Parts of A Land Contract

Not all contracts will follow the exact same order, but we have attempted to cover the key topics below;

Parties to the Contract, Legal Description, Price and Terms of Payment, Purchaser’s Duties, Taxes and Insurance, Seller’s Right to Mortgage, Seller’s Duty, Default, Assignment of the Contract, Miscellaneous Provisions, and last, Signatures and Notary.

PartiesTo a Contract

The contract begins with the “parties”-the people (and their addresses) who are entering into the contract. The “Seller” (Vendor) is the person who sold the property and is usually listed first. The “Purchaser” (Vendee) is the one purchasing the property and is usually listed after the Seller.

The date of the Contract is here at the beginning as well. Interest starts to “accrue” (begins being owed to the Seller) starting from the date typed in, at the top of the contract. Consequently, when the first payment is due, one month’s interest is usually already owed, since it is paid in arrears.

Legal Description

The Seller agrees to convey (sell) to the Purchaser only, a carefully described parcel of land. This description must be exact. When the purchase is completed and paid off, this should match the description on the deed. The city, village, or township of the property is noted, together with the county and state.

Along with the actual “earth” sold, the Seller also conveys such things as any buildings, easements, tenements, hereditaments, improvements and appurtenances. In short, the Seller conveys everything that is permanently affixed to the property.

Price and Terms Of Payment

This area should contain all the figures and dates:

Total purchase price, down payment, beginning balance remaining (the purchase price minus the down payment), monthly payment (or annual or semi-annual payment), an interest rate (usually stated in terms of an annual rate), the date of the “balloon” payment (if any), and date that the first payment is due.

Purchase Price - The Purchase price (sometimes referred to as “consideration”) is negotiated between the Seller and the Purchaser. Properties sold on a land contract often sell for more than properties that are sold for cash because the Seller provides the all-important financing.

Down Payment - The down payment is usually 10% to 20% of the purchase price. From the standpoint as the Seller, the bigger the down payment the better. It represents money that does not have to be collected in the uncertain future and it also represents the Purchaser’s commitment to the property. Sometimes, non-cash down payments (barter items such as used cars, snowmobiles, applied rent, etc.) are used as a down payment. This can be a very creative way to structure a sale!

Balance Remaining - Initially, this amount is the purchase price minus the down payment. The balance remaining will go down each month with the payments made by the Purchaser. An amortization schedule shows how the balance will be reduced if monthly payments are made on time.

Monthly Payment - The monthly payment is usually about 1% of the beginning balance. If after the down payment the Seller is owed $20,000 by the Purchaser, the monthly payment will probably be in the neighborhood of $220. The smaller the monthly payment, the longer it will take to pay off the land contract and the larger the monthly payment the faster the contract can be paid off.

Payment Due Date - This is the date when the first payment is due and usually the day of the month each consecutive payment is due.

Grace Period - A grace period in some contracts permits the Purchaser a few days each month during which he or she may fail to make payments and not be considered in default. Some contracts provide for a late fee if the payment is not received on time or within the grace period. Grace periods and/or late fee clauses are usually typed in as miscellaneous provisions at the end of the land contract. Many people mistake the last day of the grace period as the payment due date. Remember that even though a late fee you is not charged, the payment is still late.

Balloon Payment - If a contract contains a clause that reads something like, “the entire purchase price and interest shall be fully paid within 5 years from the date hereof, anything herein to the contrary notwithstanding,” then there is what is known as a “balloon” in the contract (a five year balloon, in this example). A balloon payment is the term used for a lump sum, final payment on the contract. Balloon clauses usually call for the final payment to be made on a specified date. If the Purchaser fails to make a balloon payment when required, this will constitute a default on the contract.

Interest Rate - The interest rate is usually stated in annual terms, (e.g., 11%). When recording each payment made, interest is calculated for the payment period (usually monthly) by multiplying the interest rate by the balance due and then dividing this annual interest amount by the number of payments to be made each year. This number (total interest for the period) is then deducted from the payment. The rest of the payment is known as the principal portion of the payment and is deducted from the remaining principal balance on the contract.

It’s not as confusing as it sounds. Lets look at the following example:

Consider a land contract that has a sale price of $25,000, a down payment of $2,000, and a remaining balance of $23,000, payable with monthly payments of $250 at 11%. The interest portion of the first payment will be $210.83 ($23,000 X .11 12 payments per year) and the principal portion of the payment will be $39.17 ($250 - 210.83). The remaining principal balance on the contract after the first payment will then be $22,960.83 ($23,000 - $39.17).

Taxes and Insurance

The person responsible for making tax and insurance payments can vary depending on the terms of the land contract. The three most common ways to handle the payments of taxes and insurance on the property are as follows:

1. The Purchaser pays taxes and insurance.

2. The Seller pays taxes and insurance but then adds the amounts paid back to the balance on the contract.

3. The Purchaser makes monthly contributions to an escrow account held by the Seller and the Seller pays taxes and insurance out of this account.

Method 1: Purchaser pays the Taxes and Insurance

Most often the Purchaser is responsible for paying the taxes and insurance on the property. A typical clause in a land contract where the Purchaser pays the taxes and insurance reads something like this:

“The Purchaser agrees to pay all taxes and assessments hereafter levied on said premises before any penalty for non-payment attaches thereto and submit receipts to Seller upon request as evidence of payment thereof; also at all times to keep the buildings now or hereafter on the premises insured against loss and damage in a manner to an amount approved by the Seller and to deliver the policies as issued by the Seller and to deliver the policies as issued to the Seller with the premiums fully paid.”

Method 2: Seller Pays and Adds Amounts Spent Back to Contract Balance

Since failure to pay either the tax or the insurance bills can seriously jeopardize the value of the property securing the land contract (imagine trying to collect payments on an uninsured home that just burned down!), some Sellers insist on paying the tax and insurance bills themselves. After paying the bills, the Sellers just add the costs of insurance and taxes back onto the balance of the land contract at the time that the bills are paid. Contracts of this type are sometimes referred to as “Add Backs”.

Under this option, the monthly payment will be supplemented with an amount to cover approximately one-twelfth of the estimated taxes and insurance. These larger payments (larger, that is, than they would be if they covered principal and interest amounts only) are treated just as if the entire amount of each payment was for principal and interest

This makes the balance on the contract drop more quickly than it normally would. However, when the tax and insurance bills come to the Seller, the Seller pays them and adds the amounts spent to the balance due on the land contract. Thus, the balance on the land contract, after having been reduced each month more than it normally would be because of the larger payments, is re-adjusted upward when the amounts for taxes and insurance are added back to the contract balance.

A typical clause in a contract where the Seller pays the taxes and insurance and adds them back to the contract reads something like this:

“The Purchaser is to pay monthly, in addition to the monthly payment hereinbefore stipulated, the sum of $__________, which is an estimate of the monthly cost of taxes, special assessments, and insurance premiums for the land, which shall be credited by the Seller on the unpaid principal balance owed on the contract. If Purchaser is not in default under the terms of the contract, Seller shall pay for Purchaser’s account the taxes, special assessments and insurance premiums mentioned above when due and before any penalty attaches, and submit receipts therefore to Purchaser upon demand. The amounts so paid shall be added to the principal balance of this contract.”

Method 3: Seller Pays Taxes and Insurance out of Amounts Put in Escrow

A third way to have taxes and insurance handled, similar to Method 2, is for the Purchaser to pay approximately one-twelfth of the estimated taxes and insurance along with each monthly payment. The Seller then sets this extra part of the payment aside each month into what is called an “escrow account” to pay the tax and insurance bills as they arise.

If the escrow account is ever too low to pay the bills, the Seller notifies the Purchaser and a new, larger escrow payment is included along with the next monthly payment.

A typical clause in a contract where the Seller collects an additional sum of money and deposits it into a separate account (called an escrow account) reads something like this:

“The Purchaser is to pay monthly, in addition to the monthly payment herein before stipulated, the sum of $__________, which is an estimate of the monthly cost of the taxes, special assessments, and insurance premiums for the land, which shall be deposited in a non-interest-bearing account.”

Purchaser’s Duties to Maintain Premises and Not Commit Waste

It is the Purchaser’s duty to protect the value of the property he or she is buying until it is paid in full. This clause is important because the value of the property is what keeps the Purchaser making payments. If the Purchaser ever defaults and suffers foreclosure, it is the value of the property that should enable Seller to re-sell without a loss.

Most contracts require the Purchaser to notify the Seller in writing before the Purchaser or any third party commits waste (neglects the property or allows it to be used in a way that lessens its value) or removes, changes or demolishes any buildings or improvements on the premises in a way which may diminish the property’s value.

Seller’s Duty to Provide Proof of Title and Convey Premises After Last Payment is Made

After the Purchaser makes the final payment on the contract without default, the Seller must convey the property by signing a Deed to the property.

At the time of delivery of the Deed, the Seller often also delivers an abstract of title or a policy of title insurance showing that the property is free and clear from any lien that the Seller may have remaining on the property. Which person that will pay for the cost of the insurance should be agreed upon when the terms of the purchase are made.

It is the Purchaser’s responsibility to record the Deed. The fee is nominal and recording the Deed will show as a matter of public record that the Purchaser is the new owner of the property.

Seller’s Right To Mortgage

The Seller has the right to borrow against his or her remaining equity in the property sold. In other words, if the Seller owned a $50,000 property free and clear and then sold it to the Purchaser who made a $10,000 down payment, the Seller initially has the right to collect $40,000 (his or her remaining equity in the property) and he or she may borrow money by allowing a lender to put a senior lien on the property (ahead of the Purchaser’s interest in the property) for up to $40,000. However, since the Seller must be in a position at all times to convey the Deed to the property when the Purchaser makes the final payment on the contract, the Seller can never owe someone else more than he or she is owed by the Purchaser.

To protect the Purchaser from any debts that the Seller may have against the property, the Seller must provide notice of any such mortgage and its terms in a certified letter to the Purchaser. The Purchaser also has the right to make the payments for the Seller on any debt for which the Seller is in default. Any such payment made by the Purchaser, of course, will be deducted from the monthly payment owed by the Purchaser to the Seller.

In short, the Seller must never owe on the property more than he or she is owed.

Assignment Of Contract

A Seller almost always has the right to freely assign his or her interest in the land contract. (An exception might be if the Seller is still making payments on the property himself or herself and the contract governing that purchase restricts the Seller’s ability to assign.)

The Purchaser, however, often has the right to assign his or her interest in the contract only after obtaining written permission from the Seller. This protection for the Seller exists because the Seller may have sold the property to the Purchaser on the strength of the Purchaser’s character, time on the job, or credit rating, among other things. When this Purchaser then proposes that a new person begin to be primarily responsible for making payments to the Seller, the Seller has the right to know and approve this in writing.

Such an assignment by the Purchaser to a new purchaser usually does not release the original Purchaser from obligations to perform under the contract if the new purchaser fails to live up to the terms of the original land contract.

Default

If the Purchaser fails to perform any significant part of the contract, the Seller may have the right, after notifying the Purchaser in writing of the exact nature of the default, to treat all payments already made on the contract as mere rental payments made by the Purchaser. Some states have very specific guidelines regarding default, so be sure to check with your legal professional. If the default continues, the Seller has the right to declare the remaining balance due and payable, and if the default is not then cleared up or the contract is not paid in full, the Seller can begin steps to regain possession of the property. Improvements made to the property by the Purchaser then become the Seller’s property.

Defaults by the Purchaser may include failure to make timely payments, failure to properly maintain the property, failure to adequately insure the property, or failure to pay taxes on the property as they become due.

Miscellaneous Provisions

All contracts end with a series of miscellaneous provisions regarding where payments and notices should be mailed, which state laws govern the contract, and so forth. The provisions in a standard pre-printed land contract are not nearly as important as any typed provisions at the end of the contract. Read and enforce these typed provisions carefully.

Signatures and Notary

To have a contract that can be recorded in the county records where the property is located, be sure to have the contract notarized by a licensed notary. The fee, if any, is usually nominal.

Also, have two witnesses available to observe the signing of the contract.

A land contract signed without witnesses or a notary should be fixed with the help of a local attorney or title company. This will enable the contract to be recorded for the safety and benefit of all parties.

Tips for Selling Property on Land Contract

Selling on a land contract can be an excellent way to sell a property quickly and at a good price. As conventional financing becomes even more costly, more difficult to obtain and more time consuming, Seller financing will become even more popular. (We estimate that approximately 25% of property sold is now sold with Seller financing.)

When thinking about selling a property on land contract, here are some things that should be known. The way a contract is planned and written can have a lot to do with its sales value in the future.

The Purchase Price

The purchase price is negotiated between Seller and the Purchaser, but there are some objective standards that can be used as the basis for negotiation.

One method is to have three different real estate agents do a market analysis on the property, complete with two or three “comparables” each. (Comparables are properties that are comparable to the subject property and can be used to determine its market value.) An average of these three analyses will usually give the Seller a good idea of what the property should sell for. This service is often free since the real estate agents will be competing for the right to list the property. The agent you feel most comfortable with is the one should list your property with. Attempt to find the three agents that represent most of the listings in the area your property is located.

A second method is to hire an independent appraiser to do a complete appraisal of the property, which would include (as above) at least three comparables. This method is more expensive (from $150 to $300) but is also more authoritative and is usually a much better gauge of the true market value.

The Down Payment

The down payment is usually at least 10% of the selling price. However, a larger down payment means the Purchaser has more equity and owes less, both of which make the contract more secure and thus more salable. A good thing to remember is that the larger down payment, the more a land contract is worth. The length of time the contract has been in existence also will affect the salable value of that contract. Most companies that purchase land contracts prefer older (seasoned) contracts. They show that the Purchaser is a safe risk.

The Interest Rate

The interest rate on a land contract should be at least equivalent to interest rates currently charged on mortgages by banks and savings and loan associations; preferably 1% higher. There are legal maximums in most states on land contracts between individuals. See your legal professional for details.

The Monthly Payment

A formula of 1% per month on the unpaid balance at the time of sale is a good general rule. Here’s an example:

$25,000 selling price of property-$5,000 20% down payment

$20,000 balance due

$200 monthly payment (1% of balance due); add to this one-twelfth of the estimated taxes and insurance.

On smaller land contracts (under $15,000), a monthly payment greater than 1% of the balance due is generally required.

To determine how long a contract will run given a certain interest rate and payment amount, just call a title company and they can look it up for you. There are also many good sites on the Internet that will run an amortization. This service is usually free. Assuming an interest rate of 9% in the above example, the land contract would run for 186 months (15.5 years).

Taxes and Insurance

Lending institutions generally require the buyer to pay one-twelfth of the estimated yearly real estate taxes per month and one-twelfth of the estimated insurance costs in addition to the monthly payment. At the end of the year, they have the money on hand to pay the taxes and insurance. This is also the wisest thing to do when selling on a land contract. Since the land contract will run over a period of time, there is always the chance that property taxes will be raised, so be sure to include a clause in the land contract that provides for increasing the payment when this happens.

Underlying Debt

If a Seller currently owe on a piece of property, they do not necessarily have to pay off the present land contract or mortgage. Instead, they can usually continue to make monthly payments in the required amount just as before the new land contract sale. (The original obligation is often referred to as “underlying debt” since it “underlies”- is superior to and existed before- the debt owed on the more recent sale of the same property.) Sellers should check the land contract or mortgage they are making payments on, however, to see if there is a so-called “Due on Sale” clause requiring them to pay off the debt if they resell the property. Finally, a Seller should require the land contract payment being received to be at least 25% greater than the payment they will continue to make to the original Seller.

Amortization

How long a land contract is scheduled to run is referred to as the contract’s amortization. A contract’s amortization depends on the size of the contract, the size of the monthly payment, and the interest rate being charged. (The higher the interest rate and/or the smaller the monthly payment, the longer the straight amortization will be. This is why a balloon payment is sometimes considered. Contracts with a 10- to 20-year amortization are common and are preferred to contracts with a 30-year amortization. Balloons usually are set for 5 or 10 years from the date the contract begins.

Purchasers Credit Worthiness

Just like any lender, the Seller has every right to information that shows the Purchaser has an adequate source of income to pay the land contract obligation. They can request references, find out where the Purchaser works and his or her annual income, and obtain a credit report showing how promptly he or she is paying current debts. If selling to a person with less than a commendable credit record, many Sellers increase the down payment and periodic payment requirements.

Memorandum Of Land Contract

Many times the Purchaser or Seller does not want to put on public record all of the details of the financial transaction. In these cases a Memorandum of Land Contract can be drafted, signed by all parties, witnessed and notarized.

By recording this Memorandum both parties have put the public on notice that some agreement does exist regarding the sale of a particular property. This Memorandum filing is also cheaper than recording a land contract since Memorandums are typically only one page.

Sell all or part of your Land Contract for Cash

There are many ways of getting cash from a land contract. A Seller can sell the whole contract now or, if they just need $2,000 to $5,000 for some short term goal, they can sell just a few payments now and collect monthly payments again in the future. Many of these plans can even give up to 95% or even 100% of what is due on the contract.

Why Would I want To Sell My Land Contract

When you convert part or your entire land contract into cash, you gain several advantages in addition to immediate cash:

1. You receive a substantial sum of cash right now-enough to accomplish some major goals

2. You don’t have to worry about collecting monthly payments or servicing you contract.

3. You don’t have to worry about whether the taxes and insurance premiums are being paid each year to protect your investment.

4. You don’t have to worry about whether your Purchaser will continue to make his or her payments

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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

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