What Is an Installment Sale Land Contract?
Land contracts began to disappear when loan requirements softened and mortgage rates dropped below 8%. But they have not vanished altogether and began to tiptoe back into the market during the mortgage crisis of 2007 to 2010. Previous homeowners who lost their homes to foreclosure or sold through a short sale began to lean on land contracts as a financing alternative when the big banks turned them away. An installment sales contract is any type of contract that calls for periodic payments, but in real estate, it is generally referred to as a land contract, contract for deed, or contract for sale. The installment sales contract spells out the sales price, the amount of down payment, interest rate, amount of monthly (or periodic) payments, and the duties of each of the parties. It covers such responsibilities as who will maintain the home, pay for insurance, and property taxes—which is generally the buyer. The contract includes a recourse for the seller in the event the buyer stops making the installment payments.
How Land Contracts Work
Land contracts, or contracts for deed, are a security agreement between a seller, called a Vendor, and a buyer, called a Vendee:
The Vendor agrees to sell a property by financing the purchase for the Vendee. The Vendor retains legal title and the Vendee receives equitable title. The owner-carried financing can include an existing mortgage balance or the property can be free and clear (best option). Upon payment in full, the Vendor hands the Vendee a deed to the property.
Explaining All-inclusive (Wrap-around) Land Contracts
Wrap-around contracts contain an existing mortgage:
The Vendee makes one payment to the Vendor.Upon receipt of the payment, the Vendor pays the underlying lender’s payment and keeps the rest.If the existing mortgage has a lower interest rate than the interest rate on the contract, the Vendor earns extra interest on money that does not belong to the Vendor. This is known as an override.
This example shows how they are put together:
What Are Straight Contracts?
There is no override of interest in a straight contract. The Vendee can agree to pay the existing lender directly and make another payment to the Vendor, or the Vendee can send one payment to the Vendor, and the Vendor will disburse payment to the underlying lender. Let’s look at the previous example on a straight contract:
Power of Sale
Some title companies draft and insure land contracts that contain a Vendor, a Vendee and a Trustee. You will need to call around to find such a title company. Like a trustor in a trust deed, the Vendor and Vendee assign right, title, and interest to the trustee for the purpose of securing the Vendor’s and Vendee’s obligations. In the event the Vendee stops making payments, the Trustee has the power to foreclose under the power of sale. The process of filing a notice of default varies from state to state.
Acceleration Clauses in Underlying Loans
All loans today contain acceleration and alienation clauses. Lenders may exercise a “due-on-sale” clause preventing anyone to take over an existing mortgage. Lenders prefer the buyers to qualify, pay loan points, and higher interest rates. If your land contract contains an existing mortgage, seek the advice of a real estate lawyer to prevent any unwanted surprises.
Vendee’s Bundle of Rights
For all practical purposes, the Vendee owns the property and has the right of:
PossessionQuiet enjoyment and use of the propertyExclusion, forcing others to leave the premisesResale
Benefits to the Vendee
The biggest benefit is to avoid going through the standard qualification process. In addition:
Down payment amount is negotiableLength of the contract term, interest rate, and payments are negotiableNo lender closing fees to payTransactions can close in less than a week
Benefits to the Vendor
Typically, the sales price can be higher, although buyers are advised to get an appraisal. In addition:
Possibility for a deferred gain on taxesMonthly incomeOften a better rate of return than money market accountsEasy way to sell a non-conforming propertyFast closing
What Should Buyers Do?
For protection:
Get an appraisal Obtain title insurance Engage the services of a holding company to retain possession of an executed deed and the original documents Talk to a real estate lawyer
What Should Sellers Do?
For protection:
Pull the buyer’s credit reportInclude both Vendor and Vendee names on the existing insurance policyHire a disbursement company to handle contract collectionTalk to a real estate lawyer
