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Installment Land Contracts
An installment land contract is an agreement between a buyer and seller whereby the seller finances the sale price of the property on an installment method and retains legal title until the obligation is paid in full or until some prearranged timetable of payments is met.  It is often used in place of a purchase money deed of trust or mortgage. 

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How does an installment land contract differ from a conventional deed of trust? A typical offer to purchase agreement is an interim binder contract that defines the rights and obligations of a buyer and seller up to the point of closing at which time a deed is delivered to the buyer.  In most states, the buyer will then execute a deed of trust to secure repayment of the funds borrowed to finance the purchase price.  

An installment land contract (aka land contract, contract for deed, or installment contract) defines the obligations of the parties over time and does not involve the passing of a deed and/or actual title to the property.   The buyer is allowed to move onto the property and continue making payments.  Once the balance is paid in full or the buyer has paid a substantial percentage of the obligation, the seller will then record the deed thereby passing title.  The installment land contract essentially gives the buyer "equitable" title to the property and serves as a long term financing device.

A land contract can be beneficial in the following situations: 

  • in a slow market
  • during periods of tight credit or high interest rates,
  • when a marginal borrower has difficulty qualifying for a loan with suitable terms and conditions
  • when conventional financing might not otherwise be available due to the uniqueness of the property
  • when a seller benefits from the tax advantages of deferred payments and an installment sale

Much like traditional lending products, the land contract can be structured over many years with equal payments at a fixed rate -or- amortized over many years with a balloon payment due as of a specified date to allow the buyer time to refinance. 


Buyer's Perspective

  • Provides alternative financing during periods of tight money supply
  • Affords buyers with marginal credit (that may not otherwise qualify for a loan) the opportunity to buy the property
  • Usually a lower down payment than required by a conventional lender
  • Loan processing delays are usually reduced and closing costs are lower
  • The buyer can take advantage of the usual tax breaks that come with ownership of real estate
  • Is a creative way for buyers to purchase real property without having to qualify for a loan or to pay closing costs

Seller's Perspective

  • Potential income tax advantages from the installment sale may provide some tax relief
  • Seller still holds legal title and the deed.  If buyer defaults, seller retains all payments and clear title.  
  • May be the only way a seller has of selling an otherwise hard to sell property that may not conform to traditional lending guidelines


Buyer's Perspective

  • Remedies can be harsh if buyer defaults
  • Most installment loan contracts provide the seller an option of calling the entire balance due if even one payment is missed
  • Buyer's can lose all payments made and rights to the real estate
  • No foreclosure protection is afforded as under the deed of trust foreclosure statutes
  • Since seller holds title until the balance is paid in full, there is some risk that the title could become encumbered or defective in some way

Seller's Perspective

  • A land contract is normally characterized by a lower down payment
  • To sellers who need money rather than a tax advantage, this type of arrangement is not advantageous
  • Although legal remedies may favor the seller, legal fees could be extensive and foreclosure proceedings could take some time if the buyer defaults

Buyer Caveats

Special precautions are needed to protect a land contract vendee (buyer) with regard to legal title.  

  • An installment land contract should be recorded in the Register of Deeds office  immediately after execution of the agreement.
  • A buyer who later decides to sell or borrow against the property may encounter legal and practical difficulty. Most lenders will not finance a vendee's interest without subordination by the seller 
  • Although most land contracts are assignable, subsequent potential buyers may shy away from this method of transfer of land   





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