How Does a Land Contract Work?
This largely depends on the agreement created between the buyer and seller. However, the basic understanding is that the seller transfers ownership of a specific property to the buyer after the buyer has successfully paid the agreed upon price. In many instances, the seller will require some form of down payment and then the buyer makes monthly payments over a period of time. This may include a balloon payment at a future date or, in some cases, the seller will hold the financing for the time frame of a typical loan, which is generally 30 years. Most land contracts also include the stipulation that the buyer pay interest to the seller over the life of the loan. Each of these amounts from down payment to monthly payments and interest are agreed upon by the seller and buyer prior to sale.
When the agreement has been signed, the buyer takes legal possession of the home so long as they make their monthly payments and honor their land contract agreements. Aspects of default are also agreed upon prior to sale. In some instances, sellers will require immediate return of the property if a single payment is missed. However, some sellers may offer more leeway in this area.
Why Sell Your House on Land Contract?
There are a variety of benefits to selling on a land contract. First and foremost, you have access to more buyers because your home is not limited to purchase through a conventional mortgage. which generally requires that the buyer achieve a certain credit score and have the cash for a specific down payment (often near 10% of the total purchase price). You also collect interest in addition to monthly payments and a down payment. Finally, if the buyer defaults, you get your property back and can sell it to another party in the future.
Downsides to Selling Your Home Land Contract:
Obviously when you're holding the financing for the sale of your home, you will not receive a large lump sum for the sale. Instead, you are accepting smaller monthly payments over a longer period of time. You are also giving possession to the buyer and if any damages are accrued and the buyer defaults, you will likely not be able to collect on those damages. Lastly, if the buyer defaults, you will again own the property, which means taking full responsibility for taxes, insurance and upkeep.
Why Buy a Home on a Land Contract?
One of the most appealing aspects to land contracts for many people is not having to secure a loan through a financial institution. In recent years, many banks and private lenders have tightened their lending expectations. Therefore, people who have low credit scores, cannot prove a certain level of income or don't have an adequate down payment simply don't have access to homes being sold conventionally. Land contracts give these individuals the ability to buy a property directly from the seller.
It can also be appealing for buyers to deal directly with the home seller rather than a private lender when agreeing upon monthly payments, interest rates and other aspects of the loan agreement.
Downsides to Buying a Land Contract Home:
The biggest downside to purchasing on a land contract is the seller's ability to deny transfer of ownership if a payment is missed. Even after years of on-time payments, the seller still reserves the right to reclaim their property if a payment is missed.
If you're looking for a land contract home in East Lansing or the Lansing area in Michigan, please get in touch with me at MyRealtorRob. Many sellers offer the option of land contracts and as an East Lansing Realtor, I can help you navigate the confusing world of land contract financing.
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