Using Land Contracts on Homes For Sale

How to Sell Your Home Through a Land Contract

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Land contracts are useful instruments for sellers who are selling a home and contemplating carrying the financing for a buyer. It gives sellers a built-in income and generally a better interest rate than rates offered on money market accounts or certificates of deposit. However, a prudent seller should take steps to protect equity and ensure the buyer can fulfill the terms of the land contract.

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Difference Between a Land Contract and a Mortgage

Land contracts are security agreements between a seller, known as a Vendor, and a buyer, known as a Vendee.

The Vendor carries the financing for the Vendee, which may or may not contain an underlying loan. The basic difference between a land contract and a mortgage is the buyer does not receive a deed or clear title to the property until the land contract is paid off.

Some states have laws that treat a land contract similar to a trust deed, and those land contracts provide for a trustee, giving a trustee "power of sale" to initiate foreclosure proceedings in the event the Vendee defaults on the contract. Other states give buyers a longer period of redemption, similar to those under a mortgage. For these reasons, it is important to reduce the chances of default by qualifying the Vendee.

Protecting the Seller on a Home Land Contract Sale

If you have an underlying loan, given a choice between a straight contract or a wrap-around contract, offer the wrap-around land contract. It will give you an override on the existing interest rate of the first mortgage.

Ask for legal advice about an alienation clause.

Obtain a Credit Report on the Buyer. If the buyer has filed a bankruptcy, made late payments to other creditors or, worse, no credit, those derogatory records are a red flag.

Ask for a Hefty Down Payment. Buyers are less likely to walk away from a land contract or stop paying on the installment sale contract if the buyer has made a big down payment. The more money invested upfront, the less likely a buyer will risk losing it.

Ask for Personal References. Check out the buyer's references, including past landlords. Ask about payment history on previous rentals, not just the current rental because sometimes landlords will say anything to get the tenant out of the property. Go back to the landlord before the existing landlord and inquire.

Collect the Taxes From the Vendee. Ask the Vendee to pay the taxes to your disbursement company. The company can then make the tax payments to your property assessor and you can be assured the taxes will be paid on time.

Talk to a Lawyer. It's worth it to spend a few hundred dollars to obtain legal advice before entering into a land contract. Besides, a lawyer is likely to think of something I have missed in this bullet-point list.

_{At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.}

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