Aland contract— often described byother terminology listed below— is a contract between the buyer and seller ofreal propertyin which the seller provides the buyerfinancingin the purchase, and the buyer repays the resulting loan ininstallments. Under a land contract, the seller retains the legaltitleto the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically paid in periodic installments, often with aballoon paymentat the end to make thetimelengthof payments shorter than in the corresponding fullyamortizedloan (i.e., a loan without a final balloon payment). When the full purchase price has been paid including anyinterest, the seller is obligated toconvey(to the buyer) legal title to the property. An initialdown paymentfrom the buyer to the seller is usually also required.
Since a land contract specifies the sale of a specific item ofreal estatebetween a seller and buyer, a land contract can be considered a special type ofreal estate contract. In the usual, more conventional real estate contracts, a seller does not provide a loan to the buyer; the contract either does not specify a loan or includes provisions for a loan from a different "third party" lender, usually a financial institution in practice. When third party lenders are involved, typically alien, as part of amortgageortrust deed, is placed on the property, in which the property serves ascollateraluntil the loan is repaid.
It is common for the installment payments of the purchase price to be similar to mortgage payments in amount and effect. The amount is often determined according to a mortgageamortization schedule. In effect, each installment payment is partial payment of the purchase price and partial payment of interest on the unpaid purchase price. This is similar to mortgage payments which are part repayment of the principal amount of the mortgage loan and part interest. As the buyer pays more toward the principal of the loan over time, his(her) equity (equitable title or equitable interest) in the property increases. For example, if a buyer pays a $2000 down payment and borrows $8000 for a $10000 parcel of land, and pays off in installments another $4000 of this loan (not including interest), the buyer has $6000 of equity in the land (which is 60% of the equitable title), but the seller holds legal title to the land as recorded in documentation (deeds) in a governmentrecorder's officeuntil the loan is completely paid off. However, if the buyer defaults on installment payments, the land contract may consider the failure to timely pay installments abreach of contractand the land equity may revert to the seller, depending on the land contract provisions.
Since land contracts can easily be written or modified by any seller or buyer; one may come across any variety of repayment plans. Interest only,negative amortizations, short balloons, extremely long amortizations just to name a few. It is not uncommon for land contracts to go unrecorded. For several reasons, the buyer or seller may decide that the contract is not to be recorded in the register of deeds. This does not make the contract invalid, but it does increase exposure to undesirable side effects. Some states, such as Minnesota, issue contracts without anacceleration clause, which in the case of a default leaves the seller in a position to either cancel the contract, discharging any principal deficiency, as in the case of deprecation, or to litigate for 18 months or more while letting the buyer, if not a corporation, retain their rights to the property while collection attempts are made, by which time the buyer will often qualify for bankruptcy, making the contract, when lacking saidacceleration clause, effectively an installment option, when the buyer has no other lienable assets. In bankruptcy, some regions will interpret it as anexecutory contractthat can be rejected, while others will treat it as a debt to be paid out of the bankruptcy trust. This and a wide variety of other legal ambiguities has led to a trend toward eliminating the use of Land Contracts to remove any incentives, and as a result, the disadvantages that these contracts have compared to the standard note and mortgage, which are more clearly defined in, and regulated by, law.
Although most land contracts can be used for a variety of reasons, their most common use is as a form of short-term seller financing. Usually, but not always, the date on which the full amount of the purchase price is due will be years sooner than when the purchase price would be paid in full according to the amortization schedule. This results in the final payment being a largeballoon payment. Since the amount of the final payment is so large, the buyer may obtain a conventional mortgage loan from a bank to make the final payment. Land contracts are sometimes used by buyers who do not qualify for conventional mortgage loans offered by a traditional lending institution, for reasons of unestablished or poor credit or an insufficient down payment.Land contracts are also used when the seller is eager to sell and the buyer is not given enough time to arrange for conventional financing.
There can be other advantages of using a land contract too. When a third-party lender, such as a financial institution, provides a loan, this third party has its own interests to protect against the other two parties involved, the seller and buyer. Establishing the correct title and value of the property to be used as collateral is important to the lender. Thus, the lender commonly requires title service including title search andtitle insuranceby an independent title company,appraisaland termite inspection of the property to ensure it has sufficient value, aland surveyto ensure there are no encroachments, and use of lawyers to ensure theclosingis done correctly. These third party lender requirements add toclosing costswhich the lender requires the seller and/or buyer to pay. If the seller is also the lender, these costs are usually not required by the seller and may result in closing cost savings and fewer complications. It may also be the seller's position that if the buyer requires any of these services, he could pay for the costs and make arrangements himself. For properties where only relatively undeveloped land is involved and if the seller is willing to finance, the price of the empty land may be so low that the conventional closing costs are not worthwhile and can be an impediment to a quick, simple sale. Easy financing and a simple sale transaction may be a good selling point for a seller to offer a buyer.
A land contract is a unilateral contract and cannot be assigned to another buyer without the consent of the seller providing the financing.
Because of growing concerns, theConsumer Financial Protection Bureau(CFPB) is considering regulating these real estate sales.In 2015, Texas law was changed to automatically place the legal title to the property with the buyer by filing the contract with the deed records office of the county where the property is located. While the seller loses title, the seller retains a vendor's lien in the property for the outstanding balance of the contract.
Author:Herbert Anderson Phone: 936-336-0336 Dated: July 7th 2017 Views: 151 About Herbert: Herbert (Allen) Anderson is a Houston, Texas-based REALTOR® I Trusted Adviser with an immensity of ...
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