Why–or why not–purchase a home using a “land installment contract”?

For most people I know, they got a mortgage to purchase their house. A mortgage is a loan from a lender (usually a bank, but increasingly lenders are not banks) that you pay off–a debt instrument–secured by collateral, which is the house (this is the simplified definition). With a land installment contract you can avoid much of the hassle of being approved by a lender, and there is a lot more flexibility for the buyer and seller. These benefits also mean that there are fewer protections, and often to the detriment of the buyer.

A land installment contract is a private contract for the purchase of real property. The seller retains ownership of the property until the purchase price is paid in full. The buyer retains possession of the property until the last payment is made and does have a recorded equity interest in the property. For the buyer, there is no need for lender approval, no (or lower) closing costs, interest can be deducted like regular mortgage interest, and greater flexibility (if the seller is willing) for payments, pre-payment options, improvements.

For the seller, the sale can be quick, more flexibility with contract terms since there will be a private contract with the buyer, and if the buyer defaults then the process to regain possession of the house is quicker and less expensive than foreclosure.

There are downsides for both buyer and seller. Buyer does not own the property until all payments are made, and in the event the buyer defaults then all payments made are sacrificed. For a seller, a land installment contract is typically an ongoing obligation that could last decades, and the property remains in Seller’s name for years with someone else occupying it.

A land installment contract can be an attractive alternative to a buyer or seller of real property, that offers more flexibility. With more flexibility comes less protections that must be considered carefully.

If you have questions about land installment contracts feel free to email me at julie@juliemillslaw.com.

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