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Introduction to Installement Land Contracts

This is a quick FYI to put into your knowledge database.

A type of financing where a seller legally owns a property until the buyer repays the loan

Installment sales contracts are a creative way for buyers to purchase a home without having to qualify for a loan or to pay closing costs. The contract is made between the buyer and seller with the lender’s approval.

Here’s how it works: (1) the seller holds onto the existing mortgage (2) the seller names the property’s selling price (3) the seller offers the buyer a loan at a higher interest rate than the existing mortgage (4) the buyer pays the seller a fixed monthly amount (5) the seller uses part of this money towards the existing loan and then pockets the difference (6) the seller hands over the contract on the home when the buyer is paid up.

A land contract can be compared to renting or leasing with the option to buy. Such options are different in that the agreement is usually filed and is a legal arrangement, giving the renter or lessee the option to buy the property at a prearranged time during the loan. Rent payments then become equity in the property.

While this type of agreement is usually recorded, a land contract may not be, making the legal recourse of the buyer tenuous should the agreement be flawed in some way. For example, if the seller still owes a mortgage on the property, the buyer assumes that the seller will use his monthly payments to pay the mortgage as well as any taxes or other liens, keeping the title free of encumbrances. If this occurs, the buyer owns the property free and clear at the end of the contract. If the seller does not keep up with payments owed, there could be trouble for the buyer.

Hope this gives you another idea on how to put a deal together.

Your friend,

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This entry was posted on Monday, January 7th, 2008 at 9:18 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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