The Land Contract Option

Author: Joel W. Baar
Date: 03/09/2009

In this economy, with lending standards and the lending environment having changed, land contracts have become an attractive option for many buyers and sellers of property.
A land contract is a contract between a buyer and seller of real estate where the seller provides financing to the buyer to buy the property for an agreed-upon purchase price, and the buyer repays the contract in installment payments. Under a land contract, the seller retains title to the property, while permitting the buyer to take possession of the property. The purchase price is typically paid in periodic installments, often with a short-term balloon payment at the end of the term. When the purchase price has been paid in full, the seller is obligated to convey valid legal title of the property to the buyer. An initial down payment from the buyer to the seller is often required by the seller. A memorandum of the land contract is typically recorded at the register of deeds, while the deed conveying the property isn’t recorded until the land contract is paid in full.
Although land contracts can be used for a variety of reasons, the most common use is as a form of short-term seller financing. There can be other advantages of using a land contract as well, although there are significant risks attached. Most lenders, in order to protect their mortgage interests, will require title insurance, appraisals, inspections, surveys, etc., which can add significant costs to any real estate transaction. A land contract can avoid some of those costs in some situations, if the parties are willing to take some risks, although those risks are sometimes not advisable. The land contract should be carefully drafted so the parties know the mutual expectations and obligations. At the same time, with land contracts, easy financing and a simple sale transaction may be a good selling point for a seller to offer a buyer, especially a buyer with a limited credit history, poor credit, or an inability to obtain a conventional mortgage.
There are pitfalls to land contracts, especially as they relate to the payment of taxes, the seller’s payment of the seller’s mortgage obligation (if any), and the possibility of the buyer’s default on payments. If the buyer defaults on the land contract, Michigan law has a process for the land contract to be terminated, which can be compared to the foreclosure process for mortgages in default. If the buyer defaults, the land can revert back to the seller, regardless of any improvements made by the buyer, and regardless of whether or not the buyer had any equity in the property. If you are considering a land contract, we strongly recommend that you consult with an attorney prior to signing any agreement.