A land contract is a purchase agreement for a property (the land and any improvement on it) between the owner and a buyer, where the owner retains the role of banker (mortgager) for the deal.

Basically it is a sale, just like a normal cash or mortgaged sale; however, there is no mortgage company or bank involved. In addition to all of the normal sale paperwork, there is a lending agreement drawn up between the buyer and seller which specifies a down payment and a payment schedule, based upon some agreed upon interest rate.

Since the owner is the lender in this deal, he/she also retains the title to the property as collateral for the loan. Title doe not pass to the buyer until such time as the loan is paid in full. The buyer has full and unrestricted use of the property so long as he/she maintains the payment schedule and does not default on the loan agreement. In a normal land contract there is a down payment, very similar to a normal mortgage down payment, and an amortized payment schedule.

Many land contracts also make use of a “balloon payment” at the end of some period of time that is shorter than the period of the loan amortization. For example, the payment schedule may be set up on a 20-year amortization schedule, so that the monthly payments would be the same as if you were paying the loan off over 20 years. But, the land contract might call for the loan to be paid off in 5 years with a “balloon payment at that time. At the end of five years the seller expects the buyer to be able to pay off the balance in one lump sum or balloon payment. How the buyer does that is up to him/her. He/she may refinance with a regular mortgage at that time or maybe just pay cash.

Land contracts are used quite often by people who might have a problem getting a convention mortgage, but who can prove that they are able to make the monthly payments that the seller want to see. Generally these are cases where the seller(s) don’t need all of their money at the time of the sale and see it as a way to earn a good return from the buyer.

Should the buyer default on the land contract the seller reclaims the property and keeps all of the monies paid to that point. The land contract buyer is entitled to nothing and it is as if he had been paying rent all that time. The land contract is a legally binding contract between the buyer and seller, so it should be carefully examined before signing. As always, seeking the advice of a lawyer where contracts are involved is always advised.