There are benefits and risks associated with buying through a land contract.
Buying real estate through a land contract is fairly straightforward. The buyer gives the seller a down payment, or other considerations, for the home or piece of land and the seller acts as the bank, financing the balance of the purchase price. The buyer and seller work together to negotiate an interest rate, payments, and length of the terms of the contract at the time of purchase. Generally, the seller carries the loan for a fixed number of years, or months, at which time a balloon payment is due. When the balloon payment is due, the buyer normally either pays off the remainder of balance, if any, refinances the property, and in some cases the contract can be renegotiated
A land contract allows a buyer who is not able to secure traditional financing to purchase real estate. The buyer has time to work on any credit issues he may have, including lowering his debt-to-income ratio, and to save for the down payment on a traditional loan. Plus if done properly can help to build the buyers credit, and give the buyer a track record, to prove to the bank that they can make the payments.
Pro: Win/Win For Seller
A land contract puts the seller in a win/win position. He collects rent on the property for a set number of years and then sells it for a fixed price. If the buyer fails to make payments, the seller can evict him, as he would any other tenant, if the contract is put together correctly. If the buyer is unwilling or unable to make the balloon payment, the property still belongs to the seller and he can do with it as he chooses.
Pro: Can be A Sales Tool In A Tough Market
When interest rates are high and credit is tight, there are fewer buyers on the market. A land contract can attract buyers who would not normally have been able to purchase property, and the buyer later maybe able to more easily get a home loan on the property.
Con: Buyer Depends On Seller
Unless the seller owns the property outright, he is still making payments to a lending institution. Which most lenders have a “Due on Sale” Clause, which means in general the lender, at their discursion, can call the whole mortgage due on the property If, for any reason, the seller does not make regular payments, the property can be foreclosed upon, leaving the buyer with a worthless contract and no home.
Con: Contract Mistakes
Land contract agreements must cover multitude of issues, such as what happens if the market appreciates or depreciates dramatically prior to the due date of the balloon payment. There are also concerns as to which party is responsible for maintenance of the home, who will carry the insurance on the house, and what happens in the event the buyer opts not to purchase the property. Perhaps even more complex than a standard home purchase, a land contract has special challenges, and careful consideration must go into creating the binding contract. For example, did you know if a contract is put together a certain way and recorded, the seller may have to go through legal proceedings that may take up to a year to evict the buyer in some states.
Con: The Buyer Could Feel Like The Owner
Land contracts exist in a gray area of home ownership. A buyer moves in, believing that the home is his and fully intending to purchase it. If he spends years making changes that suit him, only to fail to secure a loan when the balloon payment comes due, the seller is left with an altered home and little recourse. Like everything else about a land contract, the issue of alterations to the home must be agreed upon in advance so that the seller is not left with a home that he will have to make major repairs to in order to put back on the market. However if a buyer makes improvements on the property, and adds value the buyer maybe out with no coarse of action either. Again Iron out the details BEFORE you sign is key.
For more a little more legal definition of a land contract in Indiana, follow this link