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Beware the Perils of Land Contracts

By Lisa Scoble posted 07-15-2019 10:34 AM

  

Beware the Perils of Land Contracts

A land contract is an agreement in which the seller of a property agrees to personally finance the sale for the buyer instead of going through a third-party entity (such as a bank). The buyer pays periodic installments directly to the seller and typically does not gain the title’s property until the final payment is made.

This process lets a buyer who is unable to secure traditional financing purchase real estate by giving them time to work on any credit issues they may have, including lowering their debt-to-income ratio and saving for the down payment on a traditional loan.

But while land contracts can have their perks, the fine-print sometimes gets murky.

Here’s a real-world scenario where a disagreement over details in a land contract resulted in a legal dispute.

SITUATION

A real estate agent (who was representing a seller) worked out a land contract deal with a buyer. The buyer made the purchase with the intent to use it as an investment property to rent out. The seller was still trying to sell the property to another party after the land contract had been finalized.

PROBLEM

Due to the gray area of land contracts, the parties disagreed on who had ultimate property rights.

MISTAKE

Land contract agreements must cover myriad issues, such as what happens if the market appreciates or depreciates dramatically prior to the balloon payment’s due date. There can also be concerns as to which party is responsible for maintenance of the home, who will carry insurance on the house, and what happens if the buyer ultimately decides against purchasing the property.

Careful consideration must go into creating the binding contract. Unless the seller owns the property outright, they are still making payments to a lending institution. If the seller does not make regular payments for any reason, the property can be foreclosed upon, leaving the buyer with a worthless contract and no home.

Land contracts also leaves the seller tied to the property. If the buyer stops making their payments, the seller once again becomes responsible for the land—which means they could lose the property altogether if the buyer fails to insure it properly or pay their property taxes.

All of these nitty-gritty issues must be taken into consideration when a contract is being written, so each party has a clear understanding of their rights and responsibilities.

RESULT

The agent argued that since the contract was drafted by an attorney, the dispute was solely between the buyer and seller. The real estate agent was ble to obtain a dismissal because he had properly documented his files. Obviously, the seller was at fault because they had no right to interfere with tenants or attempt to sell the property while under contract.

PREVENTION

Like everything else about a land contract, the issue of alterations to the property must be agreed upon in advance so that the seller is not left with a home in need of major repairs before being put back on the market. In this case, the seller tried to undermine the buyer’s plans. With this in mind, real estate agents need to have a strongly-written contract to protect their clients.

Agents and sellers should also be wary of a buyer who suggests using a land contract. Their credit rating may be poor, which may indicate they would be unable to complete payments under the contract. If a buyer cannot qualify for a traditional mortgage, or a seller who doesn't have a mortgage on the property would like to collect interest and payments for selling it, a land contract might be the answer. Just make sure there’s an understanding of all the details (like insurance guidelines, property tax deductions, seller tax benefits, reporting requirements, etc.) before inking a deal.

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