What is a Land Contract?

A land contract is a contract between the buyer and a private seller of a property, wherein the seller holds the title or deed to the property until all agreed upon payments have been made in full. Because the laws governing land contracts can vary by state, it is important that the governing laws be consulted to understand the particular rules that control a specific scenario. The property at issue within a land contract may be improved or unimproved, vacant, or a home or a commercial building. A down payment is usually made, and then equal monthly installments are paid until the property is paid for or until a balloon payment is required. A balloon payment is a lump sum of money that is due at a specified time, in this case at the end of the course of monthly payments.

A land contract can be compared to renting or leasing with the option to buy, though they are not entirely one in the same. Such options are different in that the agreement is usually filed and is a legal arrangement, giving the renter or lessee the option to buy the property at a prearranged time during the loan. Rent payments then become equity in the property.

Although in many places it is legally required, a land contract may not always be recorded, making the legal recourse of the buyer tenuous should the agreement be flawed in some way. For example, if the seller still owes a mortgage on the property, the buyer assumes that the seller will use his monthly payments to pay the mortgage as well as any taxes or other liens, keeping the title free of encumbrances. If this occurs, the buyer owns the property free and clear at the end of the contract. If the seller does not keep up with payments owed, there could be trouble for the buyer. For this reason, getting the agreement in writing is important.

While a land contract can seem very attractive to a buyer that is unable to secure a conventional loan, there can be pitfalls to such an arrangement. Many sellers don't file or record the proper papers. Sometimes this is because their lender would not agree to a sublet agreement or land contract. The lender may have stipulated that the borrower must have possession of the property. Making an end run around this provision by refusing to file the land contract can cause problems if the lender becomes aware of the situation.

The lender can demand payment in full of the loan, forcing you to procure a loan to pay off the mortgage if you don't want to give up the property. If you can't come up with the money, you'll lose everything you have invested in the property and be forced to move out. This can be especially painful if you have also spent money and energy improving the property.

Even if there is no mortgage on the property, there can be back taxes or other liens that the seller owes, which could cause you to lose the property or force you to come up with extra money. If you decide to take part in a land contract, make sure the title to the property is clear. Make sure the seller intends to file the proper papers to insure that you have some protection.

A land contract can be beneficial to buyer and seller alike as long as everything is above board. If you are unsure about any aspect of a land contract, consult with a real estate lawyer and have him or her look it over.

Discuss this Article

I am the seller of the property which was sold under the terms of a land contract in N.Y. State. What is my liability exposure in the event of some unforeseen eventuality on the property?

We have a contract for deed, but the deed remains in my name until a balloon payment is made three years from now. --jack

- anon52735

I sold a house on a land contract on a 60 month to be a balloon payment at the end. the buyer had no intention of paying the balloon payment and forged or signatures using our sin at the tax office to put himself on the deed, claim chapter 13 and i can't get him out. sellers beware. land contract are very bad period.

- anon50694

I cannot believe some of the questions I'm reading on this site. My heart truly breaks at the level of ignorance (no offence at all intended). It's my hope that those who've posted these questions will not give up on their search for answers.

- anon47706

i'm the buyer. i paid $7000 down and $500 per month for three years. i pay the taxes and insurance. i have never been late. but now the seller will not take my payment. She says she is going bankrupt. i only have one more year to pay. will i lose it? i live in michigan.

- anon46872

There are multiple questions posted, when will they be answered? If there is no one to answer them then the best thing would be to remove comments as people are asking personal questions rather than comments regarding the article or some other information.

- anon46440

Editor's reply: Unfortunately, wiseGEEK is not equipped to respond to specific questions, which is why we created this discussion section on each article page. In this section, a reader may discuss article topics with other readers. Whether and when questions will be answered, however, depends on fellow readers and posters. For more information on our posting guidelines, please visit this page: http://www.wisegeek.com/article-discussion-faq.htm

I want my son to purchase a home I own and he lives in, unfortunately, he has bad credit and won't be able to get a loan through a bank. if I sell him the property through a land contract I will still have to collect payments, etc. I want to get out of the ownership entirely. Is there an agency I could go through to help me with this, or am I stuck?

- anon44783

All of these posts are great questions. However, none (only one) has been answered. So how is this website to help if the questions go unanswered. --Puzzled.

- anon42657

For more information on our posting guidelines, please visit this page: http://www.wisegeek.com/article-discussion-faq.htm

If I sell a home to my daughter and her husband (first time buyers) on a Land Contract, are they eligible for the $8000.00 rebate from the government?

- anon41315

Can i get a home improvement loan on a land contract? Kathy

- krdina53

I sold a house on land contract to an unmarried couple. During the 2 1/2 course of the land contract they got married and now are separated but they both signed the land contract agreement. If one party signs a breach of contract agreement and the other does not, do I still have to honor the land contract since the income has been cut in more than half and the party staying doesn't have sufficient income to cover payment, even tho they say they will pay every month. I want to void the land contract and take my house back...can I do this?

- anon37588

my son sold his home on land contract.The buyers are unable to get a loan which is due in January 2010. They want out of the land contract but they want to take the 10,000 down and put towards a lease option to buy. They don't have 20% into the property. Also my son has been paying the taxes and insurance on the house. I should add it was a 24 month land contract with a balloon payment at the end. My question is do the buyers have any right to the money that was from the land contract being put towards the lease option to buy? Original sale of the land contract was 135,000.

Thanks, anon

- anon37525

I am looking into purchasing a land contract home. I would like 24 months to come up with the balloon payment, however seller wants to give me 12 months. I thought a land contract meant you didn't have to deal with the banks. My friend bought one on land contract and only paid balloon when she sold it.

- anon37261

Is it possible for someone who owns the home to give it as a gift and get a land contract with me to own the home. I do a reverse mortgage and give the equity to the owner who I did a land contract with? Are there any pitfalls involved with this as far as back taxes?

- tlittle

My husband and I are in the process of completing a land contract. Everything has been listed; payments, schedule, taxes, insurance and loan percent (7.2%) but the only thing I didn't see was if the seller has a mortgage still out on the home and the financial institution it is with. I am wondering should we make our payments to the financial institution and not directly to the seller? That way the payments are logged and nothing goes unpaid. Please respond back with any other info or advice. Thanks.

- Keb370

What if the owner knowingly sells a land contract with back taxes due to be sold in Oct, probably has liens on the title to his brother who is mentally disabled and doesn't know to ask? Isn't that some kind of fraud? I just found out about it as it was done in secret, of course.

Thanks.. concerned in Ohio

- anon34336

my husband and i are in a land contract- and we are currently going through bankruptcy -we wanted to be upfront with the people who we did the land contract with, and it did not go well- they told us that our land contract was non valid as we never renewed it 2 and half years ago - shouldn't they have contacted us? also they said with us filing bk that this causes conflict of interest and they can termiate the contract anyways?

also since we are renting the land -why did we pay taxes on it this year? then they also said when we did the contract that i signed a quick claim thing? should we throw up our hands and go while we can, and realize this was a scam?

- prissygirl

Does a seller have any additional benefits by selling a commercial property to a church (tax exempt non-profit) instead of a private party? Thank you.

- vmiko

I have a land contract and due to unforeseen circumstances have fallen behind in unsecured debt. Creditors are threatening to place judgments against me and arbitration.

I live in Pennsylvania. Can the creditors place liens against the residence where I have the land contract?

- anon29252

The rules about eviction vs foreclosure might be somewhat different in different states, so it is important to know in advance what the law and the contract stipulates.

For instance in Ohio the buyer can be evicted from the property if he fails to make payments and has paid less than 20 percent of the total amount, or has been making payments for less than five years.

If however the buyer has paid more than 20 percent or has been making regular payments for five years or more and only than fails to make a payment, the buyer has to be foreclosed on.

- catapult43

I am paying mortgages for a land in Texas and one in Carolina, from the developers (separately), I feel so tight right now and i want to stop paying. I still have my primary home, vacation home and another rental home, can they put a lien on my other properties? I am willing to lose every penny I put on those lands, I just can't afford it anymore, can they sue me. If they go after me, would cost them(seller/lender) a lot of money? Would this affect my credit? They are private lenders, and the loans were not even on my credit report when I checked it.

- rhodawn

A land contract is not the same and should not be considered similar as compared to a lease option. The main reason is that a person in a home on a land contract can be evicted as a tenant. This is not true in almost all cases. If the buyer stops performing, they have to be foreclosed on, not evicted.

In a land contract it is true they don’t have title but in almost all cases they have some equitable title and must be foreclosed upon, not evicted. This matters to me as an investor because if they are on a lease option and I evict them, it takes a month or so max. If they are in a home on a land contract, I have to foreclose, which obviously costs more money and a lot more time. I wish they were treated the same so I could evict someone on a land contract but at this time you can’t.

Also, the risk of a loan being called because of the due on sale clause is almost zero, especially these days. There are potential pitfalls as you describe. But a bank or servicer is not going to call a performing loan due in this environment. And I would record a land contract to protect myself. I would happily tell the original lien holder I am managing the home for the original owner.

- anon25752

My husband & I sold a duplex to 4 buyers.. it was not recorded & now the two buyers have stopped everything that has to do with the duplex.. because the other two buyers are our friends it gives us legal right to be on the property.. he says he is going to sue us for damages,related hardships, & a lot of money.. & to take our name & the two other partners name thru the mud.. All I want to do is warn people that IF they ever have a non-recordable Article of Agreement & it is only done at a notary to just leave,,, this has been a pain & lots of money lawyer wise.. so make sure that its recorded at the courthouse..

- anon24201

If a real estate LLC purchases a house, rehabs it and sells it land contract at a $15,000 profit, when does the LLC have to claim the profit for taxes, at the time of the signing of the land contract or when the buyer gets his mortgage and pays the balloon payment and actually completes the deal?

- anon22140

my fiancee and i got into a land contract last year just because we were in hurry to own our own home. we didn't really look around, now we keep seeing homes around that we would prefer over the one we're in. if we move with or without talking to the deedholder would we be facing any legal recourse from the deedholder?

- Tsparton

me and my husband are thinking about buying a house with a land contact. how do we find out if everything is clear with the title and that the owner has filled all the right paper work and if his lender is letting him do the land contract? please get back to me!

- gaburger

I have a land contract. I just found out that back taxes from 2004-05 have not been paid by seller. I found out that the city will take over the house at the end of Dec. The seller says I am responsible for back taxes. I did not sign the land contract until May 2006. What can i do? I a legally responsible for the back taxes?

- melpom

My father had a land contract and has passed away. can i change it now-- I have power of attorney over all his business?

- anon15565

My late husband did a land contract 17 yrs. ago. I have recently applied for a ohio grant loan. I was denied because my credit report said my name is still on the mortgage of this house which he still has along with the deed to the house as well. I know very little about this whole thing!! Desperate!! Please advise accordingly.

- anon15450

I have been on a land contract for two years and the last year I have struggled to make payments on time. The seller could have taken the house back but has not made that attempt. My husband has taken a job out of state and I want to leave the land contract. I do understand I will lose what I already paid into it, I am OK with that. Legally is there anything that the seller can do to me?

- billiejean

We have a beach property that is land leased. The lease expires in 15 years. The owner of the land has denied our requests to extend the lease. Our house was purchased by our parents in the '60's and our family has enjoyed the house for years. What can we do? What will become of our house? Please respond! We are desperate. Thank you.

- pianolady322

I'm the buyer on a land contract. Can I deduct mortgage interest paid? Can I list the property for sale? With a Realtor?

- anon10535

Jeanette - First of all jurisdictions vary in how they deal with transfers of property interest. So the only sure fire way to know the laws that pertain to your situation is to consult an attorney well-versed in the topic. But generally, the transfer of property has two steps, (1) the contract, and (2) the deed. Once the contract is signed, the buyer is said to own the land even if he/she doesn't have legal title which passes when the actual deed is delivered. If you've signed a valid land contract, then you are effectively the owner. If the contract is invalid (e.g., the seller lied about something material to the sale) then you could be free of responsibility. But barring any validity issues, you will likely be legally responsible for the contract you signed. If, after the buyer signs a contract, the property decreases in value or even if its destroyed through no fault of the seller, most jurisdictions hold that the contract is still valid...and that loss is on the seller. How these rules apply to all of the particulars of your case, if they even apply in your jurisdiction, really is a question for a qualified professional.

- dudla

Hi, if my contract is coming due and my home's appraised value has dropped significantly since the land contract started 2 years ago, am I obligated to "buy" the property? Or can I walk without any legal judgements against me? We cant get financing because of this issue anyways. What are my options? We are ok with losing what we put in, and just leaving.

- Jeanette

should i enter into a land contract if i have already been approved for a mortgage just to get a lower interest rate and avoid closing costs? My current landlord seems a little shady, he initially wanted me to obtain a mortgage and once i did, now he is trying to hold the mortgage. he is refusing to give the bank the info they need to begin processing the sale such as the sales agreement, refuses to do a title search and refuses to work with my lender cuz he doesn't like her, what should i do?

- shudz12

should i enter into a land contract if i have already been approved for a mortgage, just to get a lower interest rate?

- anon5857

I have a land contract and the balloon is due in December. I have tried to obtain a loan for the property but the house is not appraising out for what I agreed to give him for the house. I do not have the difference in cash. I didn't put a clause in the land contract about the house keeping its value. My question is Can I get out of the land contract? Can he file a Judgment against me? Can this affect my credit? He still has a mortgage on the property for the amount I agreed to give him for the property. What can I do?

- amyklein

I have bought a house on contract and now I am getting a divorce and we neither want the landlord he is going to put the $120,000 on our credit, can he do that?

- anon4405

You can always apply for a loan, but you may or may not qualify. A lender may not feel it's a good risk with a "walk away" contract (one you can opt out of).

A contract is generally drawn up by the seller and agreed to by the buyer (or their representatives).

You can add clauses to a contract to protect yourself, but it is best to consult with an attorney before agreeing to a contract, to ensure that the language used provides sufficient protection.

It depends on who's actually paying the property taxes, but it can be worked out via contract. You should be able to deduct interest payments, but consult with a tax professional.

- anon3807

Question:Which party gets the tax deductions for paying property taxes and loan interest? As arranged by contract or always a certain way? Assume above board parties.

- anon3588

Where does one find a model for a land contract that protects the seller from hidden pitfalls?

- mgoldsteinwv

What are the drawbacks to selling a home contract for deed?

- anon1674

I'm purchasing a home by way of land contract how do we complete a form and where do we go to get a form.

- knesea

Can a person apply for home improvement loans while having a land contract?

- issy1958

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