What is 'Land Contract'
A land contract is an agreement between a buyer and seller pertaining to a specific tract of land. Developers advertise and sell tracts of land similar to the process of selling a real estate property. Land contracts can be broad in scope and may include both the land and real estate on the land. Many land contracts involve seller financed purchases. Some borrowers buying land may also choose to finance the purchase through a bank loan.
BREAKING DOWN 'Land Contract'
A land contract details the specific terms associated with buying a piece of property. Land contracts can be broad in scope with certain states having more generous legal rights for land contract holders than others. As a result, the world of land contracts can be difficult to navigate. As such, a buyer of land must be very careful to ensure that the terms of the contract are legally binding in case a dispute arises in the future.
Land contracts are often structured with seller financing. This can provide for a broader universe of eligible borrowers since seller financing can sometimes allow for purchasers that would not otherwise qualify for a mortgage, or for investors who wish to complete a purchase faster than a regular mortgage would allow.
Seller financing reduces the number of entities involved in selling a property. Seller financing allows the buyer to purchase the property directly from the seller over a period of time rather than paying one upfront payment. In a seller financing deal the seller determines the interest rate required, duration of the deal and any down payment required.
Seller financed land contracts may include a tract of land or they may also include land and any assets located on the land. Assets included in a land contract may include residential homes, pools, tennis courts, basketball courts, barns or horse tracks. Any assets located on the land and included in a land contract will affect the price. The seller holds the title on all assets until full payment is made at which time the title is transferred.
Land contracts are often seller financed however in some cases a borrower may seek traditional bank financing for a land contract. A borrower seeking to build on a piece of land may wish to finance the property through a bank loan. Terms of a loan for land will generally include a higher interest rate and are usually based on a shorter term. Loans for land will also often be structured with a balloon payment rather than regular installment payments. Often builders receiving a loan for land will refinance or payoff the loan with a takeout loan once the real estate is built and greater collateral value is established.