Land Contracts... What to expect?

Traditional land contract:

The seller retains legal title to the property until the land contract is completely paid off. Meanwhile, the buyer receives equitable title, which allows them to accumulate equity in the property and, in some cases, pay off their land contract by converting it into a regular mortgage, as we'll see later.

Wrap-around land contract:

A wrap-around land contract is one in which the buyer and seller agree to a seller-financed land purchase. However, the seller continues to make payments on their existing mortgage, pocketing the difference between their mortgage payment and what the buyer pays them on a monthly basis. In contrast to a straight land contract, the buyer in a wrap-around land contract receives the warranty deed to the property right away, implying that they own the home from the start of the contract.

One significant distinction between traditional and wrap-around land contracts is that the seller's lender must agree to a wrap-around land contract because they will not receive the full payoff amount. In these agreements, the lender also takes a junior lien position, allowing them to reclaim the home if the seller who holds the underlying mortgage defaults on payments.

Both land contracts typically require installment payments to be made at agreed-upon intervals. The buyer may or may not be required to make a balloon payment at the end of the term, which is a lump sum that must be paid to satisfy the loan terms.

A properly executed land contract has several components. Let’s look at a few of the basic items.

Sales Price

This section addresses how much the property is being sold for. Your obligations under the land contract will be fulfilled once you have paid off this amount of principal. If it's a straight land contract, you'll receive legal title and possession of the property upon payoff.

Down Payment Amount

Your down payment is due at closing and can be expressed in your land sale contract as a percentage or a flat amount.

Interest Rate

The interest rate is specified in the land contract, as are the conditions under which the rate can ever change. If this is the case, the timing and conditions under which the interest rate may change should be specified.

Payment Amounts

The amount of your payment should be specified, as should the frequency with which it must be made, whether monthly or otherwise. Specific due dates and late fees, as well as whether a balloon payment is required at the end of the loan term, may be specified in the contract. You should also be aware of any penalties for paying off the loan early in the contract.

Responsibility Of The Parties

In addition to the basics, the contract should include clauses stating the parties' responsibilities to each other, such as whether the buyer will agree to make the mortgage payment. The contract should specify what happens if the buyer defaults - or falls behind on their payments for the benefit of both parties. If missed payments are permitted, the contract should explicitly state the timeline for making them up, as well as the conditions under which the buyer may become delinquent to the point where the seller takes the property back.

Title Settlement

If you are the buyer, you will want language that states that you will receive legal title once all loan terms are met. It's a good idea to have it written in that the seller will make payments on the underlying existing mortgage if it's a wrap-around mortgage. If the seller fails to make the payments and the buyer loses the house as a result, they have the option of taking legal action.

You may also want to include a clause requiring the seller to keep meticulous records of your payment history. This will make it easier to pay off your land contract with a conversion to a traditional mortgage in the future.