Land contracts are a form of mortgage financing usually carried out between private parties, such as home buyer and seller. A land contract is also called a contract for deed, agreement for deed or an installment contract. Financing a land contract can be an ideal solution to a mortgage loan that is not assumable. In a land contract, the seller finances the home buyer through a series of installment payments. Legal title does not pass from the seller to the buyer until a date specified in the contract, a particular event has occurred or the last payment has been made. However, the buyer does receive equitable title while financing a land contract. Equitable title grants the buyer an interest in the property, which permits the use and possession of the property.
Specify all pertinent details of the land contract between buyer and seller, including legal address of the property, purchase price, down payment amount, interest rate, loan payment amount, the number of payments to be made, the length of the land contract financing (usually expressed in years), real estate taxes, property insurance, escrow and closing date. Ensure that buyer and seller understand the financing of a land contract. The payments on a land contract are most commonly applied to the interest on the loan first, then the real estate taxes and insurance, with the principal balance last.
Put every term of the land contract in writing. In real estate, land contracts must be documented in writing to be considered legitimate. The nature of a land contract gives the seller additional protection in case the buyer defaults on the loan. The seller most likely will record a deed or mortgage in the county records office where the property is located. In most cases, the buyer pays a down payment to the seller. In many cases, the seller secures the loan by using the property as collateral. If the buyer defaults, the seller is authorized to foreclose and repossess the property. Further, all payments made under the land contract are forfeit if the buyer defaults.
Give something of consideration. To make the land contract legally binding, the buyer must give something to the seller. Usually, an earnest money deposit suffices as consideration. Earnest money deposits can range from $500 to $2,000 for a mid-priced home. Generally, the seller requests the amount of earnest money required from the buyer.
Finalize your financing documents. The buyer should be protected in the transaction as well. Both an affidavit of agreement and a memorandum of agreement should be recorded in the public records to protect the buyer’s interests in the land contract. An affidavit of agreement is a written document in which the signer attests under oath before a notary public or an individual authorized to take oaths that the statements in the document are true. Further, a notary requires that the signer prove, by showing photo identification, that he is in fact the person indicated within the document. A memorandum of agreement is written documentation that validates the land contract. A memorandum of agreement can be a letter or a note, just as long as it is a written record.
Consult a real estate lawyer. Laws governing the interpretation and use of land contracts vary from state to state. Both the buyer and seller should seek legal assistance to execute the necessary paperwork.