While land contracts may sound like a good idea, caution is certainly recommended on behalf of the buyer. These agreements may sound appealing, but, they can cause more problems if caution isn’t exercised.
Over the years, I have had clients who participated in “lease purchase” arrangements, unfortunately, many never had the positive outcome the buyer had hoped for. These deals have a potential trap for the buyer, which is why it’s critical for the buyer to first consult with a reputable real estate attorney. You can learn more about our services here.
What is a Land Installment Contract?
A land installment contract is an agreement between a buyer and a seller for real estate such as a home or a piece of land. Wikipedia describes land agreements as:
- land contract
- rent to own
- lease purchase
- lease option
- installment land contract
- contract for deed
- agreement for deed
Here’s How It Works
Keep in mind that every contract isn’t the same and the terms can differ:
- The buyer and seller first agree on a purchase price
- A contract is drawn up
- Seller defines the rental term (usually not longer than one year), but some will agree to a lease term of 3 years; at the end of this period the Buyer must pay the full balance of the purchase price
- The two parties agree on an interest rate (which is frequently higher than the average interest rate)
- A contract expiration date (typically 2-5 years) is agreed upon, at which time the buyer must purchase or the seller may evict
- The seller finances the property
- The buyer pays monthly installments (usually based upon the market value of the home) with a percentage of the payment applied to towards the purchase of the of the property.
- Buyer is normally responsible for any taxes, insurance or maintenance repairs on the property during the rental/leasing period.
- The seller continues to hold the deed to the real estate until it’s paid in full.
What’s the Incentive for the Buyer?
The are a few reasons why these types of agreements are appealing to so many buyers:
- Banks are implementing tougher credit standards, so this is a way for the buyer to bypass the standard credit check
- The buyer can’t obtain funding on his own
- Banks now require a substantial down payment
- The Buyer can’t go through the normal channels, but wants to own a home
- After completing the contract, if he does, the Buyer owns the property
The buyer potentially has a lot to lose when participating in a “rent to own” transaction.
Lets say that you’ve made payments on the home for over two years. Suddenly your car breaks down and your teenage daughter needs a prom dress totaling over $2,000.
You decide that you’ll take care of fixing the car, buy your daughter’s dress and send the payment in a little late. Since the car and the dress cut into your rent, you’re short on money to pay the full amount of your rent/lease that month.
Then next month rolls around and you still can’t get caught up, so you send in what you can. You are now considered “in default” and the buyer has the option to terminate the contract, regardless if you’ve paid on time for over two years or not.
- Once the contract reaches the expiration date, the Buyer will most likely still have the apply for traditional financing; if the Buyer’s circumstances and credit still have not improved, the Buyer cannot complete the purchase and may lose all he has invested.
Be careful! If you’re considering a “land contract” or a “rent to own” agreement, you should have an attorney look at the contract before you sign. This is money well spent and could ultimately save you thousands of dollars down the road.