Land contracts are a way of selling property where the seller finances the sale and acts as “the bank.” Instead of having a buyer get a loan from the bank, the buyer makes payments to the seller directly until he or she pays off the balance of the purchase price. In the meantime, the seller keeps legal title to the home. Another way of explaining a land contract is that it is an agreement to sell an interest in property where (a) the purchase price is paid in installments, and (b) the seller keeps the legal title until the buyer makes the final installment payment.
Buyers and sellers often have different reasons for wanting to buy property using a land contract. Land contracts can be useful tools for family members (or other people who know and trust each other) to sell homes to one another without needing the buyer to be approved for a loan.
A good land contract is all in the writing. It is in the interest of both parties that everyone has the same understanding of the purchase. A good land contract doesn’t favor one party over the other and clearly states what the seller and buyer’s rights and responsibilities are. Unfortunately, many land contracts aren’t good. You should always seek legal advice before you sign the contract. For assistance, contact Legal Services of South Central Michigan at 517-394-3121.
A land contract isn’t right for everyone. The two main alternatives are a traditional rental and a traditional mortgage.
Traditional Rental: Unlike a land contract, a traditional rental does not result in the ownership of the property at the end of the term. However, the payments are usually less expensive, and renters have some rights land contract buyers don’t. For example, a landlord is required to keep the rental property in good repair. With a land contract, those responsibilities fall to the buyer. Unexpected repairs, like a broken hot water heater, can eat up a budget for months. With a rental, the tenant does not need to budget for these repairs.
Traditional Mortgage: A traditional mortgage is a loan given by the bank so a buyer can buy the property. The loan is “secured” by the property, which means if the buyer does not make payments, the lender has a right to take the property. Mortgages are more secure and more regulated than land contracts. They often have substantially lower interest rates than land contracts. There are a number of down payment assistance programs available, such as through MSHDA’s MI First Home. For more information on traditional mortgages, talk to the Center for Financial Health or the Financial Empowerment Center.