Buying or Selling Real Estate with a Land Contract

Buying or selling a home, commercial property, vacant land and other types of real estate with a land contract is popular in Michigan. Usually, there are no banks, lenders or mortgages involved in a land contract transaction. A land contract is primarily used when the buyer of real estate cannot obtain conventional financing to pay the entire purchase price at once. However, families also use a land contract to sell a family house, cottage or other property to children, siblings or other relatives. A land contract is also used when a seller does not want or need the entire purchase price at once and chooses to receive a steady income with payments on the land contract over time.

Although there are benefits of using a land contract, there are also risks involved that both a seller and buyer must consider. Contact attorney Bill Ager for a free consultation to learn about using a land contract in a real estate transaction. He will walk you through the entire process for a reasonable flat fee. The following are the basics of how a land contract transaction works in Michigan and important considerations when using a land contract.

What Is a Land Contract?

A land contract is a legal document between a buyer and seller for real property. Land contracts are legal in Michigan and are enforced like any other contract. To be enforceable, the contract must be in writing.

Land contracts are similar to a mortgage or a loan for property, but rather than borrowing money from a lender or bank, the buyer of the property typically makes monthly payments to the seller until the purchase price is paid in full. Prior to paying off the purchase price, the buyer has “equitable title” to the property with the right to possess and occupy the property as well as control over the property, subject to the provisions of the land contract. After the purchase price is paid, the buyer receives “legal title” to the property with a deed that is recorded with the county register of deeds. Typically, the buyer is responsible for payment of all property taxes, obtaining insurance coverage on the property and for all maintenance and repairs to the property for the term of the land contract.

Land contracts are also more flexible than traditional financing. The buyer’s credit history is evaluated by the seller, not a bank or lender. The parties are also able to negotiate the down payment, length of the land contract, monthly payments, interest rate and whether there will be a balloon payment at the end of purchase period of the land contract.

Considerations for a Buyer and Seller using a Land Contract

When using a land contract, there are several considerations for both the buyer and seller. Because the buyer is seeking financing outside of a traditional bank, the seller may set their own requirements for the buyer’s creditworthiness instead of having a bank do it. This usually makes it a lot easier to sell the property. However, in most cases prior to signing the land contract, the parties should enter into a sales agreement that specifies the primary terms of a land contract and makes the purchase of the property contingent upon a buyer’s inspection of the property and the issuance of an owner’s title insurance policy to the buyer for the amount of the sale price.

Buyers and Sellers should also be very cautious of using standardized forms for land contracts because every land contract can be different. This means you need to be very careful when negotiating a land contract and ensure that the terms of the agreement do not put you at a disadvantage. Land contracts often offer fewer protections, especially for buyers, than a mortgage does. Although either party may bring a court action to enforce a land contract, if the buyer does not fulfill their payment obligations, a seller can regain possession of the property and either keep whatever money the buyer has paid or ask for the remaining balance on the contract.

Buyer Considerations

If you are considering using a land contract to buy real estate, ask yourself:

1. What can you afford as a down payment?
2. How much can you afford in monthly payments and interest on the unpaid principal?
3. If you include a balloon payment, how will you pay for it?
4. What legal remedies does the seller have if you default?
5. If the seller has an underlying mortgage on the property, what legal issues can arise between the seller and the seller’s lender?
6. Will an owner’s title insurance policy be issued that is acceptable?
7. Is a sales contract used for the land contract purchase that makes the purchase contingent on inspecting the property and obtaining an acceptable owner’s title Insurance policy?
8. Will a deed for the property be held in escrow for release to you for recording after pay off of the land contract?
9. Is a sales contract being used for the land contract purchase?
10. If you are purchasing residential property, have you reviewed the seller’s Seller’s Disclosure Statement and Lead Based Paint Disclosure?

Seller Considerations

If you are planning to sell real estate using a land contract, consider:

1. How much of a financial return do you need, and what terms will generate that financial return?
2. How will you assess the buyer’s creditworthiness and their ability to follow through on the purchase?
3. How will you enforce the terms of the contract?
4. If you have a mortgage, will selling under a land contract impact your agreement with the lender?
5. How will the property be insured from loss or damage?
6. Does the land contract contain provisions limiting the type changes the buyer can make to the property.
7. Is a sales contract being used for the land contract sale?
8. If you are selling residential property, have you provided the buyer with a Seller’s Disclosure Statement in accordance with Michigan Law and a Lead Based Paint Disclosure in accordance with federal law?

Contact Bill Ager for a Free Consultation About Your Land Contract Transaction

A land contract is an attractive alternative to a traditional mortgage that can facilitate the purchase or sale of real estate. However, using a land contract comes with unique risks and legal considerations. If you are considering purchasing or selling real estate using a land contract, contact Michigan real estate attorney Bill Ager for a free consultation. Bill is committed to offering legal services for a reasonable flat fee. To speak with Bill about your real estate transaction, call (734) 649-0784, email bill@agerlawoffice.com, or use our online contact form.