Your guide to land contracts (part 2 of 2)
Learn how land contracts work and what their terms mean.
By John Murphy, MBA, CMB, Vice President, Mortgage Lending
A land contract is simply an agreement between a buyer and seller of real estate, typically a residential property. Like any legal agreement, however, the details of the contract are critical in order to protect the interests of all parties.
Buyers who seek out properties where the seller is willing to consider a land contract must recognize that the property owner is acting not only as the seller, but also as the bank or mortgage company in the transaction. Like any lender, they will apply terms and conditions to the financing. Let’s look at some of the key components of a land contract and how they affect the buyer (called the “vendee” in land contracts).
Down Payment and Monthly Installments
Sellers will require a down payment, just like a traditional lender. Sellers (or “vendors”) are typically not concerned about documenting exactly where funds come from, an advantage for buyers. In most, cases sellers do not conduct a rigorous pre-qualification like a credit union or bank would. However, buyers should be confident in their ability to make the monthly installments over the entire term of the agreement.
A “balloon” in a land contract is a single large payment to pay off the balance owed at the end of the land contract term. Buyers should have a plan in place to come up with this payment, typically in 3 to 5 years. Will you be able to qualify for traditional credit union financing at that time? It is never too early to begin this conversation with your Consumers mortgage loan officer.
Despite the best-laid plans, defaults sometimes happen. Buyers need to understand:
- What constitutes default.
- What happens to the down payment and monies paid.
- What the remedies, or cures, are for the default.
Improvements, Repairs, Taxes, and Insurance
These are all typically the responsibility of the buyer. Not paying taxes, letting insurance lapse, and inadequate maintenance can be reasons for the seller to declare a default. Are these items in your monthly budget?
These are just a few of the terms that should be a part of a properly drafted land contract. Other things to consider are:
- Buyer’s right to sell the property while subject to a land contract.
- Buyer’s right to make substantial improvements.
- Seller’s right to mortgage the property.
- Proper application of all monthly installments.
Remember, always consult a qualified real estate attorney who is familiar with Michigan land contracts to make sure you, as the buyer, are protected.
Note: This is information is provided for informational purposes only and should not be considered legal advice. Consult a qualified real estate attorney whenever you consider buying or selling property with a land contract.