What is a land contract?
A land contract is an agreement between a buyer and a seller regarding a specific plot of land. Developers advertise and sell plots of land similar to the process of selling real estate. Land contracts can be broad in scope and can include both land and real estate on the land. Many land contracts involve purchases financed by the seller. Some borrowers who buy land may also choose to finance the purchase with a bank loan.
Explanation of the land contract
A land contract details the specific conditions associated with the purchase of a property. Land contracts can be broad in scope, with some 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 land buyer should be very careful to ensure that the terms of the contract are legally binding in the event of a dispute in the future.
Land contracts are often structured with vendor financing. This can provide a broader universe of eligible borrowers, as seller financing can sometimes allow buyers who would not otherwise qualify for a mortgage, or investors who wish to complete a purchase more quickly than would be possible. ordinary mortgage.
Vendor financing reduces the number of entities involved in the sale of a property. Vendor financing allows the buyer to purchase the property directly from the seller over a period of time rather than paying an initial payment. In a financing agreement with the seller, the seller determines the required interest rate, the duration of the agreement and any required down payment.
Vendor-funded land contracts can include a parcel of land or they can also include land and all assets located on the land. Assets included in a land contract may include residential houses, swimming pools, tennis courts, basketball courts, barns or horse tracks. Any asset located on the land and included in a land contract will affect the price. The seller holds title to all assets until full payment is made, at which point the title is transferred.
Land contracts are often financed by the seller, however, in some cases, a borrower can apply for traditional bank financing for a land contract. A borrower seeking to build on land may wish to finance the property with a bank loan. The terms of a land loan generally include a higher interest rate and are generally based on a shorter term. Land loans will also often be structured with a lump sum payment rather than periodic payments. Often builders who receive a loan for land will refinance or repay the loan with a takeout loan once the building is constructed and a higher collateral value is established.