Are you looking to use a land contract as a way to purchase property?
Well, you’re not alone!
Land contracts are a common seller-financed alternative to a traditional mortgage.
And they are often used for vacant land transactions because there are benefits for both buyers and sellers.
In this blog, we’ll tell you everything you need to know.
Keep reading for more!
1. What is a land contract?
A land contract is a contract between the buyer and seller of a real property in which the seller provides the buyer financing for the purchase and the buyer repays the resulting loan installments.
In this arrangement, buyers who have poor credit are able to purchase the property through owner financing.
Land contracts are also called contracts for deeds and installment sale contracts.
2. How does a land contract work?
A land contract does not follow the same process as a traditional home purchase.
Here’s an overview of what you should expect.
Find a seller offering owner financing
The first step in this process is finding a seller who is offering owner financing.
A real estate agent, listing, or third-party service can assist with this process.
Look for ones that specifically specialize in land contracts for best results.
There are also many sellers on land-specific listing sites, such as LandWatch, that offer owner financing.
Negotiate the terms of the land purchase agreement.
Before you move forward with a land contract, you’ll need to agree to the terms.
Buyers and sellers will work together to set these out.
The land purchase agreement includes the purchase price, interest rate, loan term, installment amount, and down payment (if any).
These are a lot of different details and you want to make sure you understand and are comfortable with them all.
Visit the land
At this point, you will likely want to visit the land to make sure it meets your needs.
You may also choose to do an appraisal and commission a survey and/or perc test at this time.
Get it signed.
Are you ready to sign your land contract?
Once both parties agree, you can move forward and sign your agreement!
After that, you’ll pay the down payment (if there is one) and the buyer’s equitable title will begin as soon as the contract for deed is signed.
Record your land contract with your county.
Contract for deeds are often registered with the county after being signed.
Although this depends on the state and the seller.
Recording isn’t always required.
Make your payments.
Buyers then make monthly payments to the seller or loan servicing company.
You’ll want to stay on top of this because not paying could cause you to forfeit your rights to the property entirely.
Pay off the loan.
You’ll gain the full title to the property when your loan is paid in full.
Start paying off the loan as soon as possible for the best results.
3. What should a land contract cover?
A land contract should cover the following elements.
Do not sign a land contract agreement without these components.
Complete payment terms
Knowing how you must complete payment is essential.
What is the purchase price of the property?
Is there a down payment?
If so, what is it?
What is the payment schedule you’ve agreed upon?
What is the installment amount?
What is the interest rate?
What is the loan term?
What is the balloon payment amount (if applicable)?
Be sure to spell all of these out in writing, so each party is clear how payment will be handled.
Responsibility for property taxes and other fees
When you own a property, you must pay property taxes.
However, who does this is a little bit gray in a land contract.
Parties should discuss who will pay annual property taxes and other required fees, such as HOA dues.
Often, the cost itself will be covered in the installment payment (meaning the buyer will pay for them).
However, you want to know that someone is actually making the payment so that it doesn’t fall to the wayside.
Default procedure
What constitutes a default in this contract?
What are the penalties for defaulting on the contract?
What are the buyer’s options for bringing the loan current as well as the seller’s options if the buyer defaults?
This isn’t necessarily fun to discuss, but it is important that both parties know what happens if the buyer defaults.
Additional provisions
The additional provisions in the land contract agreements often cover what happens when the buyer gains the legal title to the property.
Additionally, will the buyer be able to make changes to the property?
Can the buyer transfer their interest in the property to another party without notifying the seller?
Having this in the contract keeps it clear for everyone involved.
Addendum
If additional terms are added to the contract after it is executed, an addendum may be included in the contract.
4. Why are land contracts used?
Land contracts are used because they are advantageous to both the buyer and the seller.
For the buyer, it provides an option to purchase real estate when they do not have good credit or if they’re not able to obtain approval for a mortgage for some other reason.
For sellers, they have more options for potential buyers and can often negotiate a higher purchase price on the property by offering this type of deal.
5. What are the advantages of using a land contract?
Both buyers and sellers benefit from a land contract, which is why this type of option exists.
Here are the top three advantages to using this option:
Easier financing:
Owner financing cuts out the middleman, meaning the closing can often happen faster than when a lender is involved.
Without a third party, you eliminate the hurdles that other lenders levy.
You can also remove a number of the financing fees that lenders charge.
Great option for sellers:
A seller will sell their property while also getting a periodic income stream throughout the term of the contract.
Plus, they aren’t entirely dependent on the buyer.
If the buyer happens to default on the payments, then they can take the property back according to the terms set out in the contract.
More opportunity for buyers:
Under traditional loan guidelines, a buyer may not be able to qualify for a mortgage.
However, the land contract makes it possible.
Buyers may also be able to negotiate creative or favorable terms, such as a low down payment.
6. What are the disadvantages of using a land contract?
Wondering what the catch is?
Land contracts aren’t for everyone even if they’re helpful in certain situations.
Here’s why they’re not always beloved.
Buyer is dependent:
Buyers place a lot of trust in the seller with land contracts.
This is because there are fewer legal protections than with a traditional mortgage.
For example, if you’re a seller who is still making payments on your mortgage and you offer a land contract, then you could still default on your own payments.
If this happens, then the buyer could lose the property through no fault of their own.
They may have made the payment to you on time, but if you didn’t pay your mortgage, then it would ultimately impact them.
Contract stipulations:
Your seller may require certain terms that won’t work for you as the buyer.
For example, in many cases you won’t be able to pull a building permit until the end of the loan term.
High interest rates:
Land contracts often have high interest rates because the seller is taking a risk.
Ownership:
Land contracts are in a gray area for ownership.
A traditional land contract creates a situation where the buyer receives equitable title.
However, the seller continues to hold legal title to the property until it is paid off.
Often, ownership is also complicated by the fact that not all land contracts must be recorded with the county.
While recording will be required in some areas, others will not require you to file it with the local city.
7. How can you convert a land contract into a traditional mortgage?
Some buyers will convert their land contract into a traditional mortgage over time.
This is possible to do if they get their credit in shape and meet other qualifying criteria.
Often, buyers will pay down the sales price before they obtain a regular mortgage and buy the property outright.
After about 5 to 10 years of regular payments, they will make a balloon payment for the balance of the land contract.
This balloon payment is typically what buyers take out a mortgage on because they now have the credit and earnings to qualify for the loan.
Here are some of the other steps to converting your land contract into a traditional mortgage if you’re interested in doing so.
Go through the process of getting standard income, asset, and credit checks
Get a copy of the fully executed land contract so that the lender will know the balance they’re paying off so they can determine the loan amount
Provide the lender with a payment history
Just keep in mind that many lenders do not like to lend to real estate transactions involving vacant land, regardless of the individual buyer’s credit and financial history.
8. When does the buyer become the new owner of the property?
The buyer is considered to have an “equitable title” to the property when they are making payments to the seller.
As an equitable title holder, the buyer has an interest in the property, which means the seller cannot sell the property to a third party.
The seller also cannot subject the property to a lien or encumbrances that would interfere with the buyer’s interest in the property.
That said, the “legal title” of the property remains with the seller until the buyer makes the final payment.
When that is made, then the deed will be filed with the correct government office and new owners of the property will officially be named.
9. What happens if payments are not made on time?
If the buyer defaults on the contract, the seller can file a court action called land contract forfeiture (although in some cases a court action isn’t required for the seller to begin the default process).
This means that the buyer gives up all money paid to the seller for the property according to the land contract.
It also means that the equitable title of the buyer will be extinguished.
So, in non-legal terms, this means that if the buyer fails to pay then the seller gets to keep all the money that was paid up until that point AND the property itself.
While the seller may take some risk by selling with a land contract, they also have the safety net of a land contract.
It’s really up to the buyer to make sure that the contract is something they can abide by and make sure they make those payments on time!
10. Do you need to have an attorney review a land contract?
Land contracts can be a good option for buyers.
With that said, it’s something that you’ll want to take seriously.
Real estate rules (as they pertain to land contracts) vary depending on the state, and you’ll need to pay close attention to these depending on your area.
If you’re being extra careful, you’ll involve an experienced real estate attorney to review your land contract.
11. How can I calculate the amount I will pay in interest on a land contract?
Land contract agreements are sometimes interest-only, which means that you make interest-only payments for a few years and then pay off the loan with a balloon payment.
In this case, the sum total of your payments will be the amount in interest you pay.
Other times, the payments will include the principal amount.
To calculate your total interest for this kind of loan, use the following formula: Principal Loan Amount x Interest Rate x Time (aka Number of Years in Term) = Interest
Whether your loan is interest-only or not will depend on the terms of your specific land contract.
Final thoughts
Land contracts are a non-traditional way of purchasing the property of your dreams.
Are you considering it?
Make sure you use these tips for the most successful outcome!
Additional Resources
If you are looking to buy affordable land, you can check out our Listings page.
And before you buy land, make sure you check out Gokce Land Due Diligence Program. 
Don't forget to check out my latest Gokce Knowledge Class: 31 Lessons I Learned Selling My First 500 Properties Online. 
If you are looking to sell land, visit our page on how to Sell Your Land.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.
who is responsible for lawn mowing during the contract in Ohio?
Hello Harold, thank you for your comment. This will depend on what is worked out between the parties involved in the contract.
Can you get a home equity loan still on a land contract?
Hello Natasha, it really depends on your lender and the specifics of the land contract, but my guess is that it would be very difficult to get a home equity loan on a property that is still under a land contract.
IN MICHIGAN HOW LONG DOES IT TAKE TO EVICT MY BUYER ON A LAND CONTRACT WITH 20,000 DOWN THAT DOESN’T MAKE HIS PAYMENT?
There are rules in every state for the procedures of a land contract, AKA agreement for sale or contract for deed. typically the down payment is calculated as a percentage and their equity is calculated so that buyers have x months to pay off or the forfeiture is process in the court. Did these twice in AZ and it works well but you may have to wait 3=4 months and it is best you hire a real estate attorney to file the right forms. Perhaps $1000 ball park but, getting your house back is a good investment.
When you buy a house on land contract in Michigan do you own the house and the land or just the land?
Hello Tanise, it really depends on the details of the land contract and the deal. If you are buying a home on a land lease, you may be purchasing the house, but leasing the land. Other times, you may be buying the house and land through owner financing and, thus, will own both at the end of the loan term.
Can a land contract contain a variable interest rate provision updated annually and linked to the 1 Year LIBOR interest rate?
Hello Ron, with owner financing the specifics of the interest rate are up to the seller, but the buyer may also be able to negotiate or suggest specific terms.
Hi Erika ,
Couple questions for you if you dont mind 🙂
Recently got married. My wife is contemplating selling her house to her renter through land contract.
1) Does she have to pay off mortgage before initializing LC or is that only needed for final payment once balloon is due?
2) How does it work for capital gains ? She’s selling house for about 200k more than what she paid. So are we right to assume the longer we go with land contract the better we are battling capital gains tax?
3) Would we do the initial start of LC agreement at a Title company ?
Hello Scott,
To answer your questions:
1. I would speak to your lender about this.
2. I would speak to your accountant as you may be able to report gains through the installment method.
3. That is up to you. However, if you do not use a title company, I would recommend working with a lawyer.
I hope this helps!
How many years in WISCONSIN can you be in a land contract for? Is the time frame up tot the seller?
Hello April, I believe it would be up to the seller, but you may want to check with a local real estate attorney.
Erika,
I have sold land on contract. The contract has been fulfilled. What kind of deed should be drawn up (would a quitclaim be OK). Which party is generally reponsible for paying for this?
Hello Mark, the type of deed is up to you, what guarantee you are willing to make and what you negotiated with the buyer. If the buyer uses a title company, it would usually be a warranty deed. The person who pays for the deed prep is also based on negotiations.
If a buyer stops paying on his land contract and the owner of the land finds the buyer to have deceased. How can the owner get the contract voild?
Hello Kathy, I would recommend speaking with a local real estate attorney, but if the buyer has stopped paying the land contract (regardless of the reason why), you should be able to default the loan and take the property back.
Can you get out of a land contract. I live in Ohio.
Hello Jason, it depends on the language in your contract. Some contracts do allow a buyer to cancel a contract at will.
I have a land contract and intend to get a convetional loan to pay off the contract and take possession. Would the seller be on the hook for income tax from this sale ???
Hello Richard, the seller will likely need to pay income taxes, but it depends on the specifics of the sale.
There is no paperwork on land contract what rights does owner have
Hello Dannie, could you clarify? Are you saying there is no written contract for your land purchase at all?