A Land Contract Form, also known as a Land Installment Contract or an Agreement for Deed , is an extremely common type of real estate form used between the seller and buyer of a real estate property. In this agreement, the seller technically retains ownership of the property but the buyer gains control of it in all practical matters except legal ownership.
How is a Land Contract Used?
In almost all land contracts, the seller lends the buyer the money to buy the property, and the buyer will pay the loan back in several installments over a period of time. In order to be granted the loan to purchase the property, the buyer will have to give the seller a down payment of a small percentage of the loan.
In order to ensure that the seller makes a profit on the loan they have given the buyer, the buyer will also have to pay off interest on the loan they have received. Depending on the type of mortgage, the loan may also have a balloon payment at the end. A balloon payment is a type of payment that the buyer must pay upon finishing paying off the rest of the loan and is much more common in commercial real estate than it is in residential or personal real estate.
Reasons for Using a Land Contract.
While there are theoretically a wide variety of circumstances and situations where a Land Contract Form, in actuality the number of situations where it would come into play are fairly limited. By far the most common use for a Land Contract is for a seller to give a buyer short term financing to purchase property. The agreement will usually include a date for when the entire loan must be paid off, often significantly sooner than it might be under a normal mortgage. The balloon payment will kick in at this time. Given how large the balloon payment can be, it is not uncommon for the buyer to obtain a more traditional loan to pay for the balloon payment.
A land contract is most commonly used in place of a mortgage for a buyer who might not be able to obtain a loan through more common means, such as a bank or other financial institution. The reasons for the buyer being unable to obtain a loan through normal means must not usually be reasons such as poor credit history or failure to pay off previous loans.
The other primary reason for to obtain a land contract instead of a more traditional mortgage is to avoid having a third party bank or other financial institution involved. As a third party will have its own desires and interests, they may conflict with the needs of the buyer or the seller and can therefore complicate the dealings or relationship. By keeping the contract solely between the buyer and the seller, the contract can remain simple and clear, without any conflicts from other parties’ needs or interests.