Many people ask me to explain exactly what is a land contract and how does it differ from seller financing. A land contract (also called contract for deed or installment land contract) is a form of seller financing. The major difference between land contract and traditional seller financing is that the deed does not transfer until the loan is paid in full. The buyer gets possession of the property and makes payments over an extended period of time to the seller and when the purchase price is paid in full then the seller conveys legal title of the property to the buyer. The buyer has "equitable title" under the contract and has the right to receive "legal title" upon paying off the balance of the loan.
Think of it like buying a car. You go out and buy a car and put some money down and get financing for the rest and when you payoff the loan you get the legal title to the car. In the meantime, you have equitable ownership and total responsibility for the maintenance, insurance, taxes, etc. of that vehicle.
Like a mortgage, the land contract is a security device, but it lacks many of the formalities of the mortgage law. Many land contracts have a forfeiture clause (if allowed by that states laws) which allows the seller to get the property back upon the buyer defaulting on the payments. This process is typically much faster than a mortgage or deed of trust foreclosure. In a few states a land contract must be foreclosed like any other mortgage.
So, let’s take a look at an example:
House purchase price including expenses: $82,800
House Sales Price: $125,000
Down Payment Collected: $12,500
Unpaid Principal Balance: $112,500
Loan Rate and Term on UPB: 8.95% and 15 years
PI Payment: $1137.71
IRR (Internal Rate of Return): 18.1% for next 15 years
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