It can be intimidating entering the housing market and attempting to buy your first home. Selling a home can be equally confusing when deciding what the best option is for yourself. One often-overlooked option is a land contract, but what are its pros and cons?
The main advantage of a land contract is that it can help you buy or sell a home quickly. Land contracts are also great because of the flexibility that they offer to both the buyer and seller. Unfortunately, land contracts can be confusing leading to disagreements on payment plans, insurance, and maintenance.
Communication is everything when it comes to land contracts, and it’s important to be on the same page. Follow along as we take a close look at how land contracts work, as well as their pros and cons.
Table of Contents
What Is a Land Contract?
A land contract is an agreement between a buyer and real estate ownership where the buyer pays it off in increments. Land contracts are the same concept as a mortgage, but the financing comes from the property owner instead of a lender. In many cases, land contracts serve as an alternative to a potential buyer that simply cannot be approved for a mortgage agreement.
Legally, the title to the house belongs to the real estate owner until the buyer makes the final payment. The buyer can still live in the home and go on as if they own it, but they must make the agreed-upon payments. Payments are determined by the real estate owner, but they’re often made over 5-10 years.
A land contract may sound too good to be true, but the financing and security benefits are a plus. Many future homeowners sadly cannot qualify for a mortgage plan, and land contracts are their best shot at buying a home. Let’s explore the upsides of buying and selling a home through a land contract agreement.
Land contracts boost sales for both buyers and sellers leading to a healthy housing market. Buyers are more likely to purchase a home via a land contract if they have a low credit score and don’t qualify for mortgages. Sellers benefit just as much because land contracts open the door to more potential buyers and less time on the market.
Land contracts allow a wider range of potential homeowners to enter the housing market. You can also generate income as a seller when you implement a land contract as it is similar to renting a house to someone. The only difference is that once the final payment is made, the house is the buyer’s, and the seller can now move on.
You spend more money the longer your house is on the market, and that’s less money towards your next house. Selling a house via a land contract can expedite the process and put money in your pocket quickly. Of course, sellers get less money all at once when implementing a land contract, but that money is still coming their way.
The same applies to buyers because they can spend less money and still get the benefits of owning a home. Buyers can also negotiate with sellers to see how long they want the land contract to last, and that determines payments. You can turn around and sell the house and get your own fast money once the land contract is paid off as a buyer.
Buyers and sellers both benefit from the flexibility that land contracts provide, and that’s one of the main benefits. The agreement can be based on what works best for the buyer and seller mutually, and a discussion is all it takes. Buyers can explain their financial situation to a seller, and a land contract can be drawn up around that.
Similarly, a seller can explain what kind of payment plan they expect, and the two can come to an agreement. This is more flexible than a mortgage payment plan which offers little in the way of wiggle room to a buyer. You won’t have to deal with inflated interest rates because the seller is also the lender, and that can save you money.
Buyers benefit most in land contract deals because it allows them to save up their money. Down payments are not always required in land contracts, and that money can go to the first payment. Even if the seller requires a down payment, it is often more negotiable than if you bought the house outright.
Land contracts are essentially an exit from the rental market for those that traditionally couldn’t afford to buy. You can even live in a home under a land contract while saving up to buy a different home altogether. This means that land contracts are not only convenient, but that they can wind up putting more money in your pocket.
There are downsides to land contracts, such as disagreements between the owner and the seller. Sure, land contracts offer flexibility and freedom, but they can lead to misunderstandings. Let’s explore some of the downsides of entering into a land contract.
Sometimes, buyers will go straight into renovations once they’ve entered a land contract to the chagrin of the seller. Renovations can be allowed, but not if the seller stipulates that they are not comfortable with that. However, if a buyer begins renovating and cannot make payments, they will be evicted while a house is still being worked on.
This creates a big problem for the seller, and possible legal trouble for the buyer if it violates the contract. Land contracts can be confusing, and buyers sometimes jump right into changing the home they just entered. Both sellers and buyers should enter a clear agreement about alterations and renovations so that the contract isn’t violated.
Lose Down Payment
Land contracts don’t always require down payments, but when they do, the buyer can sometimes lose it. Down payments are lower than the traditional 20% and are more often between 3.5% and 10% for land contracts. Besides paying money each month on the land contract, the buyer often has to pay a one-time down payment when closing on the house.
However, if the buyer violates the land contract or misses payments, they may lose the down payment altogether. This could be a major blow to buyers entering land contracts in the hopes of saving money. Legal action can be taken for buyers that lose their down payment in a land contract if a judge deems it unfair.
There are some things that landlords cannot do, but sellers in land contracts have much more freedom. For example, they can implement a stipulation that requires the rest of the money if a buyer misses payments. Buyers can avoid this by carefully reading the contract or enlisting the help of an attorney to scrutinize it.
Sellers in a land contract are not the same as lenders, so rules are not enforced quite as strictly. Because of that, you can be forced to pay in full even if you miss a single payment. You can contest this as a buyer, but it may not work in your favor if it was part of the original contract.
When you rent a home, you know that the owner is responsible for repairs and maintenance. That is less clear when you enter a land contract, and that can be a problem for some buyers. Some land contracts stipulate that the buyer is responsible for repairs, and others say the opposite.
Buyers mustn’t rush into repairs without first checking to see who is responsible for them. Sellers cannot force you to pay for repairs if the contract states that it is their own responsibility, and vice versa. This also applies to insurance and it’s important to know whose name the insurance is in when you enter a land contract.
What Did We Learn?
Land contracts are a great option for buyers that cannot qualify for a mortgage plan. Sellers benefit from land contracts because they can often get their house off of the market faster. However, it can be a problem when buyers immediately go into altering and renovating the home, especially if the contract states that they can’t.
Another common problem is that buyers can be forced to pay in full if they miss a single payment. This depends on the contract, but failure to pay in full when in violation can lead to an eviction. It can take a long to get approved for an apartment, but land contract deals generally go quickly for both parties.
Land contracts can be confusing, and it’s important to know what the seller is responsible for and what falls on the buyer. However, land contracts are usually more flexible than mortgage plans, and you can reach an agreement with the seller. Entering a land contract as a buyer or a seller is a great option for both parties if you can reach a mutually beneficial agreement.