What is a Land Contract?

A Land Contract is a type of owner financing that allows the buyer to make payments to the seller for a home or land purchase. The buyer gets to use the property but the seller hangs onto official title until paid in full.

The contract comes under several names including Real Estate Contract, Contract for Deed, Installment Sale, and Land Contract. It is an alternative way to document the seller financing arrangement from the more common Note and Mortgage or Note and Deed of Trust.

One big consideration with a Land Contract is that the buyer will not receive the Warranty Deed to the property until the purchase price is paid in full. That means the seller stays in control as official title holder while the buyer makes payments. Think of the contract like a layaway program for the Deed.

So what’s the big difference? Well with a Deed of Trust or Mortgage the seller provides a Deed to the buyer at closing, transferring title to the buyer. Then the buyer simultaneously gives back a Purchase Money Mortgage (or Deed of Trust in some states) to the seller for the portion financed. When the amount financed is paid in full the Lien is simply satisfied.

When the seller holds fee simple title using a Real Estate Contract the buyer is holding equitable title. Since the buyer does not yet have the Deed it is almost impossible for the buyer to obtain any type of secondary financing unless the Contract is paid off.

The buyer also risks the seller encumbering or clouding title before the Contract is paid and the Deed released. To provide greater protection, the Fulfillment Warranty Deed can be held in trust by a third party escrow servicing agent

If the buyer quits paying and the seller needs to take back the property, a Real Estate Contract has the advantage of being faster and less expensive than a drawn out foreclosure process on a Mortgage or Deed of Trust.

The accepted use of a Real Estate Contract varies by state. They are common in many Western states like Washington, Oregon, Idaho, and New Mexico along with some Mid-Western states such as Michigan and Wisconsin. However a few states, like Texas, have passed regulations to prohibit use of Contracts for Deed.

A Real Estate Contract can be unrecorded or recorded at the county level depending on local practices. A seller can also sell contract payments for cash now. Just know that some investors may require conversion to a note and mortgage or a note and deed of trust.

A knowledgeable title company or real estate attorney can assist in selecting the best method of documenting the seller-financed transaction.

For more information on buying or selling with contracts read Personal Profit Series: Notes – The Complete Money Making System to Buying, Referring, Creating and Holding Real Estate Notes!

How HUD Safe Act Will Hurt Seller Financing

Be afraid!

HUD is poised to take away our rights to offer owner or seller financing on property we own. Under the Safe Mortgage Act proposal, you can only offer owner financing on the home you live in or you must become a licensed mortgage originator.

Here’s how I see it. If we own a property, ANY property (whether it is our residence or not), we should be able to sell to a buyer with owner financing.

HUD’s proposal is to provide an exemption to “where an individual seller provides financing to a buyer pursuant to the sale of the seller’s own residence” (Item F Page 66551 of the HUD Summary Comments).

Unfortunately, this exemption does not go far enough. What if you bought the property lived in it and then moved? What if it is now a rental property, inherited, or simply bought for investment purposes?

At a minimum the exemption should be extended to include any transaction where the seller provides financing to a buyer pursuant to the sale of property the seller owns (regardless of whether it is the seller’s residence). Read more

Top 5 Articles on Seller Financing

Owner financing was a hot topic in real estate last year and all indicators point to increased demand in 2010.

In search of alternative financing methods, Read more

Obtain Pricing on Notes in 3 Easy Steps

What is a fair price for a cash flow note in today’s market? Here are 3 easy steps that brokers and sellers can use to receive pricing before they sell a note. Read more

Owner Financing – The Top 3 Reasons for Seller Financing

All things being equal, the average seller would prefer to sell a property and walk away from closing with all cash rather than a note for part of the sale price.

Then why do sellers agree to take back financing? Here are the three most common reasons behind the installment sale. Read more

The Many Faces of an Owner Financed Buyer

Have you ever tried to describe the “typical” buyer purchasing property where the seller provides financing? Many mistakenly think of only those that are “down and out” on their luck.

Let go of preconceived notions and start looking at seller financing as a potential creative financing solution. Read more

Using Owner Financing with the $8,000 First Time Home Buyers Tax Credit

The government is offering first time home buyers an $8,000 tax credit in an effort to stimulate the ailing real estate market.

Sellers can attract buyers by highlighting the refund in their ads, especially when used in conjunction with owner financing. Read more

Home Builders Offer Seller Financing Incentives

It was one of the first signs of a weakening housing market. Builders desperate to move increased inventory started offering incentives in hopes of enticing buyers to their developments.

These incentives ranged from Read more

How Congress Wants to Change Seller Financing!

Rarely does legislation have the potential to impact the world of seller financing as severely as HR 1728: Mortgage Reform and Anti-Predatory Lending Act.

This informative article by Ric Thom helps explain the ramifications of this proposed bill and what action we can take now to protect owner financing and our private property rights. Read more

How To Profit With Real Estate Tax Liens!

Interested in profiting from real estate but looking for an alternative to mortgages, foreclosures, tenants, or flipping real estate?

Purchasing the right to collect on delinquent real estate taxes can be a lucrative investment even with limited capital. Read more

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