A land real estate contract is akin to a private financing contract where real estate – either real property and/or structures on that property – is changing hands.
In this article, learn how a land sale contract works, why they are still used today, who is responsible for paying what, details about deed holders, pros and cons and much more.
What Is a Land Sale Contract and How Does It Work?
A land sale contract, sometimes also called a sale to land contract, is a written record detailing a transaction wherein land is bought and sold using seller financing rather than a traditional mortgage.
This type of real estate contract outlines key specifics about the land trading hands as well as the details of the financing agreement between seller and buyer.
Both the buyer and the seller must sign the land sale contract indicating they are in agreement with all the terms of the exchange and the financing required for it.
Why Are Land Sale Contracts Used?
There are mutual benefits to both buyers and sellers to opt for a land real estate contract over a traditional mortgage arrangement.
After the great mortgage crash in 2006 and the subsequent 2008 financial crisis, traditional mortgage loans became much harder to obtain. Not all land buyers have the requisite credit history and credit score to qualify for traditional big bank mortgage loans.
When a buyer cannot be approved for a traditional mortgage for these or other reasons, a land sale contract offers two interested parties another viable way to conduct the transaction.
Sellers also reap some potential benefits by agreeing to a land sale contract rather than stipulating a traditional mortgage loan agreement. For starters, sellers often find they have access to a wider pool of potential buyers by offering a land sale contract option.
Sellers may also enjoy greater bargaining power, including a higher purchase price, by offering interested buyers who cannot qualify for a traditional mortgage the option of a sale to land contract instead.
In some cases, sellers may also require buyers to make a larger initial down payment (called an “option to buy”) as a part of a land sale contract agreement.
Who Pays Property Taxes on a Land Sale Contract?
A land sale contract puts the responsibility for paying property taxes on the shoulders of the land buyer.
Not only does the land buyer need to pay the property taxes, but the buyer is also responsible for paying interest and insurance premiums as well as any other fees stipulated in the contract for deed agreement.
As a perk for paying the property taxes, the land buyer can also write this off on their annual tax filing as an expense.
Who Holds the Deed in a Land Sale Contract?
A contract for deed agreement transfers the deed to the property from seller to buyer little by little. This is called having an “equitable title” and it offers some valuable protections to both seller and buyer.
For the buyer, the presence of the land sale contract and its equitable title effectively prevents the seller from re-selling the property under agreement to a third party before the transaction is complete.
This equitable title also prevents the seller from placing any kind of undue financial burden (such as a lien) on the property in the process of being re-deeded.
For the seller, retaining the majority of rights to the deed (legal title) is a protection in the event the buyer does not complete the payments required to receive the final property deed.
In this way, with a sale to land contract, the deed to the property remains in the hands of the seller until such time as the contract is satisfied and payment is made in full.
Only at that time does the contract for deed on the property finally transfer to the land buyer.
Land Sale Contract Pros and Cons
A land sale contract offers benefits and drawbacks to both buyer and seller.
For the seller, this type of real estate contract offers a way to sell land when a buyer is not able to obtain traditional mortgage financing. The seller can also assess an option to buy up-front payment (similar to a mortgage downpayment) as a cushion against future land devaluing or buyer default.
Another benefit to the seller of entering into a land sale contract is that they can stop paying property taxes on the land under contract right away. However, the seller also loses the option to write off that cost on their annual tax filing.
For the buyer, the benefit occurs in reverse – that extra tax write-off now transfers to them, along with the responsibility of paying the property taxes on the land under contract.
For the buyer, a land to sale contract offers a way to purchase land after being declined for mortgage financing. It also gives the buyer a built-in exit strategy in the event property values decline or circumstances change to the point the land purchase is no longer desirable.
In most land to sale contracts, the buyer’s right to make modifications to the property under contract is limited until the agreement is paid for in full. This is also a valuable protection for the seller in the event the buyer defaults and the land goes back on the market.
Because a land sale contract is a private financing agreement, there will be no big bank mortgage lien holder watching over the process or vetting the legality of the agreement. This can be a major drawback for both buyer and seller, so it is important that both parties have the contract reviewed by a real estate attorney prior to executing the agreement.
Both buyer and seller also take risks in brokering a real estate sale through a land to sale contract rather than a traditional mortgage lending agreement. Both risk devaluation of the property or its resale value over time. Both also bear the risk of a potential default that could have negative financial consequences on each end.
One drawback the buyer typically bears is that the purchase price under a land sale contract is often higher than it would be with traditional mortgage financing. Choosing to use a land sale contract means the seller is free to set a higher valuation on the property without having to justify the purchase price to a mortgage lender.
What Happens If the Buyer Fails to Make the Land Sale Contract Payments Due?
It sometimes happens that the buyer’s circumstances change and renders them unable to make the contract payments as they fall due. When this occurs, it is called “defaulting” on the sale.
If a buyer defaults on the land to sale contract, the seller can then move to what is called a contract forfeiture. A contract forfeiture allows for the seller to retain all the land payments the buyer has made to date and also extinguishes any existing equitable title the buyer holds on the property.
This means the seller can then enter into a new agreement with a new buyer to sell the land, keep the land in their possession or something else. All ties between the buyer in default and the land seller are now null and void.
Having the option of a contract forfeiture is an important protection to the seller, but also to the buyer in the event circumstances prevent further payment towards ownership of the land.
By understanding how a land sale contract works, what it is used for, the pros and cons of such an agreement and what occurs if the buyer defaults on the agreement terms, it becomes possible to know if this is a viable method to conduct a real estate transaction.