Disadvantages Of Using A Land Contract
Most of the disadvantages of land contracts for buyers of property stem from the fact that the vendee (buyer) does not receive the deed to the property at closing. The vendee obtains equitable title, but the vendor (seller) retains legal title. This situation usually exists until the land contract is paid in full. Mortgage loan lenders are highly regulated, mostly to protect buyers/mortgagors. Land contract vendors are not.
A individual seller can be more demanding than a lender. The vendor sometimes feels she has the right to inspect your property. No seller has this right, unless you specifically have granted it in the land contract. A mortgage loan company will never do this.
Some installment loan contracts give the seller an option of making the entire balance due and payable if only ONE payment is missed or is late. Be certain that your contract doesn’t have a clause like this. You wouldn’t want to lose your home simply because you forget and are late making a payment. Repossession procedures are much more strictly regulated for mortgage loans from a commercial lender than for an individual land contract vendor.
***I stress that I am not a lawyer, am not pretending to give legal advice, but am just expressing my opinions.***
The vendor might not wish to allow prepayment. While prepayment penalties are rarely found in mortgage loans anymore, a seller may wish to prevent you from paying off the contract because s/he wants to keep the income stream. Be sure that your land contract does not contain a clause that prevents you from paying the balance in full before the contract expires - you may want to sell, or refinance your contract sale with a loan from a lender.
The biggest reason I stay away from them in our business is that I am not the owner. I enjoy owning.
Well theres my thoughts....Now Go Get A FREE House!!
Tony Severino
Comments (1)
My biggest concern with a land contract is performance on the seller's part. Leaving the title in the seller's name is a big red flag for me. Contracts are only as good as the people who stand behind them. I would not do it if I had to invest money into fixing the property up and/or I expected prices to increase dramatically over a short period of time, like we are seeing now. I am buying a house, with zero equity, subject to the existing loan. For me, this is a short term 2-3 year play to capitalize on what I hope will be rapid appreciation. The seller contacted his attorney, and as always, the attorney's answer was 'no.' He proposed a land contract to protect the seller from me encumbering the (zero equity) property, taking title to the house, then putting a 25 year lease and stealing the mythical large deposit a residential occupant would be willing to pay, and lastly, me going in and stripping the house of appliances and heating system, then not making payments on the underlying loan. While all somewhat valid arguments, these kind of objections make me think attorneys take special classes in paranoia. Since I am investing nothing more than closing costs, I agreed do an AITD. I don't know a whole lot about land contracts and I'm just not comfortable buying a property on paper, but not putting it into my choice of vesting.
Aaron Mazzrillo, almost 11 years ago