Land Contract Versus Mortgage
By Steve Gillman - 2006
What is a land contract? It is a contract used when selling
a property on payments, also called a "contract for deed,"
and other names in different areas of the country. This is basic
seller financing. The buyer wants an easy way to buy, you want
the interest, so you take payments on the property.
However, a land contract is not quite the same as a mortgage
loan. You sign a contract, and the buyer takes possession of
you land or home, but you do not deliver the deed until every
last payment is made. That may sound safer than handing over
the deed and taking back a mortgage, but it isn't necessarily.
In fact, it can be more dangerous.
Which is it in your case? You'll have to ask a good real estate
attorney. The laws are different in different areas. In either
case you have a clear legal path to take back the property if
the buyer defaults on the payments. However, the process may
not be the same. Years ago, where I lived in Michigan, the time
it took to foreclose and get the property back was about the
same for either the land contract or mortgage, so the two seemed
about equally safe.
An attorney told me, however, that because the two are sometimes
handled by different courts, the time difference can be greater.
In some southern Michigan counties it took six months to foreclose
on a mortgage, but two years for a land contract. The lesson?
Find out which takes longer where you are. You don't want a non-paying
buyer to sit in your house for years.
More about Land Contracts
What are the other advantages and disadvantages of each way
you can structure the deal? Well, ask an attorney in your area,
but a land contract can be easier to draw up. There are plenty
of preprinted forms for this. Also, a buyer may feel more inclined
to keep current on the property if he doesn't actually have the
deed to it. The other advantages go to the mortgage though?
Why? These are lessons learned the hard way. I've sold several
pieces of property on land contracts. The first lesson came in
the form of a notice from the township that said I had fifteen
days to clean up the junk cars in the yard of a small rental
house or pay a minimum $500 fine. I had sold the property years
before, but even though the tax bills went to the new owner,
I was ultimately responsible for the property in their view,
since the deed wouldn't transfer to him for several more years.
I couldn't even talk to the renters, since I was no longer
the landlord. After a couple calls to the new owner, to remind
him to call the renter, the cars were eventually moved - and
just in time. The lesson? Be aware that you are still responsible
for the property until the deed is signed over.
Another lesson about the dangers of a land contract came in
the mail last month. We had sold our home in Michigan on a land
contract, and the buyer was behind on taxes, according to the
notice from the county. Fortunately he paid them after I hinted
at the possibility of foreclosure, and this is a problem you
can face with a mortgage too, but that wasn't the end of it.
I soon got a letter in the mail offering to lend me money to
pay those "back taxes." Apparently they send this to
the name on the title - and I don't know if this means those
late taxes can show up on my credit report. Hmm...
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