Land Contract FAQ

A land contract, also called a contract for deed, is an agreement between a buyer and a seller of real estate in which the buyer pays monthly installments directly to the seller, with no involvement by a third party lender. Land contracts are commonly used when the buyer cannot obtain financing.

Possession

• Since land contracts are most often used to benefit buyers with weak finances, most land contracts require only a small down payment, if any at all. The buyer is entitled to move in as soon as he signs the contract and pays either the down payment or the first installment payment. After that, the seller is not entitled to enter the property without the buyer's permission, absent special circumstances such as fire code violations or default.

Title

• Unlike a typical real estate sale and purchase agreement, in a land contract the seller retains legal title to the property until the buyer finishes paying all installments. The seller should also retain physical possession of the title document. When the buyer remits the last installment payment, the seller is obligated to assist the buyer in transferring title to the buyer's name and having a new title document issued.

Installment Payments

• A land contract may be structured with a down payment followed by equal monthly installments, no down payment and equal monthly installments, or no down payment and a large "balloon payment" as the final installment. The buyer and seller are free to structure the payments in other ways as well--a graduated payment structure, for example, for a buyer experiencing temporary financial difficulties. The land contract should list the principal, the interest rate, the total price, the amount of each installment, and the date each installment is due. It should also provide reasonable penalties for late payment.

Encumbrances and Title Defects

• The seller should warrant that his title is free from encumbrances, such as mortgages or tax liens. If any encumbrances exist, these should be listed in the land contract, and the buyer should demand a discount on the total price that reflects the value of the encumbrances. The buyer should perform a title search at the county land recorder's office to confirm the actual state of the title.

Default

• If the buyer defaults before completing the last installment payment, the seller is entitled to eject the buyer from the property, with no need for foreclosure proceedings. For this reason, default provisions should unambiguously set forth the events that will trigger default--three late installments payments in a row, for example. The buyer should seek a guarantee that in the event of default, the seller will refund any amounts paid by the seller that exceed the reasonable rental value of the property, if this amount can be readily determined.