Get Started
6 min read

Benefits and risks of a land contract

Featured Image

There’s no shortage of real estate financing options to consider. One alternative option is a land contract. While this arrangement can prove beneficial in certain circumstances, it also involves a great deal of risk for both parties. Explore all of your different financing options to secure your dream property under the best possible conditions. 

 

What Is a Land Contract and How Does It Work?

A land contract is essentially seller financing wherein a buyer pays a down payment on a property and continues to pay the owner a specified amount until the agreed upon sales price is reached. At that point, ownership of the property is transferred from the original owner to the new buyer. A land contract involves negotiation and agreements between the buyers and the sellers to reach favorable terms that both sides can agree to. 

 

What Is Included in a Land Contract?

Creating a comprehensive and clear land contract will benefit both the seller and the buyer. Here are some things that you should expect to include in a proper land contract:

  • Sales price: The first thing you need to agree upon as part of a land contract is the sales price. Once this amount has been paid off, ownership of the property will officially be transferred to the buyer. 
  • Down payment: The second thing you need to agree upon as part of a land contract is the amount or percentage of the down payment. Down payments are needed in a land contract to give the buyer a vested interest in keeping up their end of the bargain. While the down payment may need to be negotiated with the seller, you can typically request to pay 5 to 10% of the home’s value. 
  • Payment terms: The third thing you need to agree upon as part of a land contract are the payment terms. How much will you be paying? Will you be paying on a monthly basis? Are you also paying for things like property taxes and home insurance? These are all factors that need to be outlined in the contract ahead of time. 
  • Interest rate: The fourth thing you need to agree upon is the interest rate involved in the loan. Typically, buyers can expect to pay a higher interest rate than they would otherwise pay if they were using traditional financing methods since there are risks involved for the seller to enter into such a contract. Seller financing will typically come at a high interest rate.
  • Rights and responsibilities: Finally, you need to include rights and responsibilities for both parties within a land contract. In order to cover all your bases, it’s probably a good idea to consult a real estate attorney with experience in this area. A clear and complete contract is beneficial to both the buyer and the seller. 

 

What Are the Benefits of a Land Contract?

Although you may already be aware of some of the benefits involved in a land contract, odds are there are others that you never even considered! So here are just a few of the benefits of a land contract:

  • Accessible financing: Perhaps the main benefit of a land contract is that it offers more accessible financing for buyers who may not be able to qualify through traditional lending avenues. For instance, if a buyer has a below-average credit score or a spotty work history, they could still purchase a home through this option. 
  • Beneficial for the seller: Land contracts don’t just benefit the buyer, but they also benefit the seller. A land contract gives the seller access to a consistent stream of cash from the rent being paid on the property. At the same time, they can rest assured that the property will eventually be sold for a set price without having to worry about listing it, marketing it, and showing it all over again. 
  • Buyer incentive: Although buyers definitely don’t need incentives in the current seller’s market, offering a land contract acts as an incentive that attracts buyers who otherwise wouldn’t have been able to buy. This incentive definitely wouldn’t be necessary for the sale of single-family homes these days, but it may be ideal for less desirable real estate options like condos. 

 

What Are the Risks of a Land Contract?

While there are benefits of land contracts, there are also risks involved. At the end of the day, it’s up to you to weigh the associated benefits and risks to make the best possible decision for your personal financial situation. 

  • High interest rates: If you’re a buyer, this is a major con of a land contract. This is especially true at a time when interest rates are particularly low for mortgages. While the exact rate will be negotiated with the seller, it’s generally higher than normal rates due to the risk and burden being taken on by the seller. 
  • Dependence on the seller: Again, if you’re a buyer, a land contract requires that you place a lot of faith in the seller. This is especially true if the seller still owes money on their current mortgage. If the seller doesn’t make payments, the buyer could end up losing the home as well through no fault of their own. As a result, it’s important to negotiate a strong and detailed contract between both parties. 
  • Contractual and legal vagueness: Even with a contract, there’s a lot of vagueness involved in a land contract that can cause issues down the road. For the best possible contract, you may want to consult with a real estate attorney who is apprised on the ins and outs of land contracts. 

 

Can You Convert a Land Contract?

Depending on the terms of your land contract, it may be possible for you to convert it ahead of the time. For instance, say you were able to improve your credit and secure traditional financing for the property. You could then go to the sellers and agree upon a sales price using your financing to purchase the home outright. While this process can seem complicated at first, it can be simple if you have the right documentation and information. 

For starters, you will need to provide the lender with a copy of the land contract so they are aware of the purchase price, existing mortgage status, and title information. Additionally, you will need to provide information about your payment history as it relates to the land contract. Not only does this help them determine the status of your current agreement, but it could also secure you more favorable loan terms by showing that you’re a reliable and trustworthy borrower. 

 

Other Financing Options to Consider

Although a land contract can be a beneficial way to secure nontraditional financing for a home, there might be other financing options out there that would work better for your situation. Take bridge loans, for instance. Many people don’t know that they can use bridge loans to cover the purchase price of a property while they wait to secure more permanent financing. 

Bridge loans are flexible and efficient in terms of conditions and closings. For instance, bridge loans given by Vaster Capital are approved or denied within 24 hours and closed upon within a few weeks. An efficient financing process can help you stay competitive in a crazy market that’s often dominated by cash buyers that can pay quickly and up-front with little to no conditions. 

Bridge loans often come with interest rates that are lower than other types of loans, like hard money loans. For instance, you could expect to pay 10 to 15% in interest for a hard money loan while only paying 7.5 to 10% for a bridge loan. Furthermore, bridge loans offer more amenable qualifications that allow people without established credit histories to borrow, like foreign investors

As a result, if you’re looking to purchase real estate with the best possible conditions, you could consider a bridge loan from Vaster Capital. 

 

Final Thoughts on Land Contracts

Land contracts allow buyers to make real estate payments directly to the seller while they maintain ownership of the property. This type of arrangement can benefit both the buyers and sellers with the right terms and conditions. That being said, this agreement also presents risks for both parties. For a less risky loan option, bridge loans from Vaster Capital provide you with the financing you need to get your name on the title now. 

 

Sources:

5 Questions to Ask When Hiring a Real Estate Attorney | SmartAsset.com

Advantages & Disadvantages of a Land Contract Vs. Mortgage | Houston Chronicle

Complete Checklist of Documents Needed for a Mortgage | USNews.com