- I’m really interested in buying and selling on land contract. However, I’m a little confused. Do I need a purchase contract that is separate from the land contract, or are they the same thing?
If I buy a house on land contract and turn around and sell it on land contract, how do we handle the insurance? I’ve read that the original seller should add me, the buyer, as an additional insured to his policy. What about the guy that buys from me? How would this work?
Also, can you recommend any good sources of reading materials on land contracts that go in to these ‘little’ details that most books don’t seem to want to cover.
Thanks!
Land contract (a.k.a. contract for deed or “installment sale agreement”) is a contract between the owner of the real property (called the “vendor” or the “seller”) and a person who wants to buy the property (the “vendee”, “contract purchaser”, “purchaser” or “buyer”)for an agreed-upon purchase price. Under a land contract the vendor grants equitable title to the vendee (which consists of virtually all rights to the property other than actual legal title), and the vendee agrees to pay the purchase price to the vendor over time, usually in monthly installments, by a certain date. When the full amount of the purchase price is paid, the vendor is obligated to deliver legal title to the vendee by an actual deed, and upon delivery of the deed, the vendee owns equitable and legal title to the property.
Equitable title, for all intents and purposes, makes the purchaser the “owner” of the property. There are several “land contract friendly” states in the US, while other states make it extremely difficult to sell or purchase real property by means of a land contract.
It is common for the installment payments of the purchase price to be similar to mortgage payments in amount and effect. The amount is often determined according to a mortgage amortization schedule. In effect, each installment payment is partially payment of the purchase price and partially payment of interest on the unpaid purchase price. This similar to mortgage payments which are part repayment of the principal amount of the mortgage loan and part interest.
Although land contracts can be used for a variety of reasons, their most common use is as a form of short-term seller financing. Usually, but not always, the date on which the full amount of the purchase price is due will be years sooner than when the purchase price would be paid in full according to the amortization schedule. This results in the final payment being a large “balloon” payment. Since the amount of the final payment is so large, the buyer usually obtains a conventional mortgage loan from a bank to make the final payment. Land contracts are often used by buyers who do not qualify for conventional mortgage loans offered by traditional lending institutional, for reasons of poor credit or an insufficient down payment. Land contracts are also used when the seller is anxious to sell and the buyer is not given enough time to arrange for conventional financing.
How do you, as the buyer, protect yourself from the seller not making the mortgage payments?
From everything I’ve read, the buyer can protect himself by making the mortgage payments directly to the original mortgage company. If the payment to the seller is more than that, . . . make up the differenct with a second check to the seller.