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Wednesday, May 3, 2017

The MLS listing mentions that the Seller is offering a Land Contract. What’s that?

 Understanding the Real Estate Process from A – Z – A Buyer’s Guide to Real Estate – Part 9

This is the ninth post of a series in an FAQ format that I hope will help would be buyers better understand the real estate process that they are about to go through. There is a follow-on series to the posts for real estate sellers.

FAQ – The MLS listing mentions that the Seller is offering a Land Contract. What’s that? I want to buy a house not land.

A Land Contract is just another way of selling the house. In that case, the Seller is offering to take on the role of the bank or mortgage company and finance the sale himself; thus, it is also known as Seller Financing.

If the Seller is offering a Land Contract the MLS information should also contain the terms under
which the Seller will accept a Land Contract. Those terms should include what the down payment amount has to be, the interest rate that the Seller will be charging and the term or length of the contract that he is offering. Land Contracts usually require a hefty down payment of at least 20%, sometimes more. Land Contracts are usually written for interest rates that are 1 or more points above the prevailing mortgage rates. It would not be unexpected to see Land Contract interest rates in the 5-7% range. The Seller is assuming the risk that you will default, so he is trying to mitigate that risk through the big down payment and the higher interest rate. Don’t be surprised if the Seller asks for as much financial information from you as a bank might. He is trying to assess the risk involved is selling to you on the Land Contract.

Land Contracts are most often written and balloon payment loans with a fairly short length, usually 3-5 years. That means that you will have to refinance and get a regular mortgage at the end of the Land Contract period. That is why people who are recovering from a foreclosure or bankruptcy use this method of buying, so that they can repair their credit enough to eventually get a mortgage. The payments during the Land Contract period are usually calculated using a 20- or 30-year amortization schedule, so the payments are about what they might be if you were able to get a mortgage at the interest rate offered.

There are some other things that you need to know about Land Contracts. One is that the actual deed
to the property does not pass to you until such time as the Land Contract is paid off. The deed is usually held in escrow by a title company until the Contract either is paid off or the Seller forecloses to take back the property.  The risk of foreclosure is still present in a Land Contract and the contract itself will have the terms defined under which the Seller may foreclose and regain possession of the property. That usually involves non-payment of the monthly “mortgage” payments to the Seller. The terms and conditions of the Land Contract also define the responsibilities of the Buyer to maintain insurance on the property and to pay the property taxes. There will be provisions in the contract for the Seller to foreclose if wither of those responsibilities is breached. There may be specific terms about how the Buyer is to prove to the Seller that those items are being kept up-to-date.

While the buyer is considered to be the new owner of the property, there will usually be some terms and conditions that may define restrictions on the Buyer as far as modifications to the property are concerned. These will usually not get so detailed and restrictive so as to prevent things like painting the interior or updating areas like the kitchen or baths; however, putting on major additions or tearing down existing improvement or outbuildings may be prohibited. Remember that the title has not yet passed from the Seller to Buyer and the Seller is using this property as the collateral for the loan; so, he has an interest in keeping the value of the property up.

Another thing to keep in mind is that all of the advice about doing a good home inspection still applies, as well as perhaps having a good appraisal done, too. If you write an offer to buy a property on a Land Contract, that does not mean that you ae just accepting it “as is”. The offer should contain off of the normal contingencies that a regular real estate sales contract off would have. That is where having a Realtor involved, even in a Land Contract sale is valuable. Your Realtor will use his standard Purchase Offer contract, which has all of the protections that you need already in it. If the home inspection reveals defects that you can’t live with, you should be able to negotiate with the Seller to have them repaired or the sale price modified to reflect what it will cost you later to get them repaired. You will also be protected for things like title defects, flood plain insurance requirements and other standard contingencies. Don’t think that, because this is a Land Contract sale, you don’t have a right to those protections. If the Seller won’t agree to use the standard real estate Purchase Agreement terms and conditions just walk away; he is an unreasonable Seller. There will be a separate Land Contract document later which you should review carefully and have an attorney look over for you. 

Land Contracts can be a win-win way for a Buyer who can’t qualify for a mortgage right now, but who has a steady income, to buy a property. It often provides those who when through a foreclosure
or bankruptcy a way to buy a new home. It is also a good way for self-employed people to buy, since they may not have (or may not wish to share) the kinds of financial records that the mortgage companies pike to see. Some Land Contracts are offered at rates that rival mortgage rates and buying using this financing method doesn’t have to be any different than buying with a mortgage.

I usually encourage the Buyers and Sellers to meet and get to know each other. That way both parties can assess what it might be like to do business with the other. If your first impression of the Seller is that he’s a hard-ass who would be a pain to deal with during the Land Contract period, I would ask you why you want to get involved with that type of Seller. You should also feel out the limits of what the Seller is willing to let you do to the property under the terms of the Land Contract. You seldom would ever get to meet anyone from your mortgage company with any real authority; however, in the case of a Land Contract, you are doing business directly with the Grand Poohbah, the guy with the authority to foreclose on you, if you mess up.

So, if you like a property that offers a Land Contract and that is the only way that you can afford to buy it; go for it. But go for it with your eyes open. You will need that hefty down payment and it will cost you more than with a regular mortgage; however, the Seller may be more willing than a banks to take a chance that you have your life straightened out now and can make the payments. Set your goal to get your financial house in order during the period of the Land Contract and be ready to get a mortgage when the balloon payment at the end comes due. Good luck!

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