There are situations where a person selling their real estate can benefit from working with the buyer, so there is no need to get financing from a third party. This can be effective for selling or buying land as well as buildings. It is known as a land contract. Under this agreement, a buyer takes ownership of the property based on the terms of the contract. The buyer’s payments for the property go directly to the seller and not a third-party lender. This is an effective method for small business owners and others without a good credit history to obtain property. There are a number of advantages and disadvantage for anyone who choose to use a land contract for their real estate transaction.
Creating A Land Contract: Impacts Buyers And Sellers
A land contract can provide a number of issues, both pros and cons for both parties. Real estate markets can change at a moments notice. The market can appreciate or depreciate significantly right before a balloon payment is due. There could be disputes when it comes to determining which party will be responsible for certain types of maintenance on the property. It needs to be established which party should carry insurance on the property. It also needs to be determined what will happen if the buyer decides not to keep the property after a period of time. Alterations, as well as improvements to the property and more, are items that need to be covered in a land contract.
Increase Buyers: Advantage Seller
An advantage for a seller when it comes to offering a land contract is the number of potential buyers increase significantly. This makes it possible for people who have overcome financial mistakes in their past to avoid rejection by a third party lender. The ability to enter into a land contract and quickly take possession of a property is appealing to many individuals. The seller is able to get the best possible buyer and determine the terms of the contract. The income from a property can be spread out over a long period of time. The amount of monthly payments can be determined by the seller.
Secure Mortgage: Advantage Buyer
An advantage for a buyer is the ability to always get a loan and pay off the land contract. A buyer is excited at the opportunity to get property without third party financing. This can work well for a period of time. Situations often change. After a period of time, a buyer might be able to get financing that will benefit them. It could provide the buyer with lower payments. When they’re done paying, the buyer would still own the property. A down payment provided by the buyer could also be used as equity when they apply for third party financing.
Qualifications: Disadvantage Seller
A disadvantage for a seller using a land contract is selling to an individual or entity that can’t or won’t qualify for third party financing. This may turn into a problem. It is possible that such buyers could begin to miss payments. There have been situations where a buyer has gotten so far behind in making land contract payments; they simply walked away from the property. In this situation, the seller continues to own the property, but the buyer could have damaged the value of it. It’s possible the cost of the repairs could be more than the amounts of the payments received.
No Good Title: Disadvantage Buyer
When a buyer is involved in a land contract, there is a chance a seller may not be able to provide a good title when the contract is completed. This could occur for a variety of reasons. There could be a lien on the property, and the seller didn’t share that information with the buyer. The seller could declare bankruptcy, experience a divorce and more. These are things that would keep the seller from executing the property’s deed. If a seller passes away prior to the completion of the contract, a buyer could have problems getting the title from the heirs of the seller’s estate. If this happens, a buyer could lose any down payment and all payments they made on the property.
Transaction: Advantage Buyer And Seller
A buyer and seller could both benefit from the ease of completing this type of transaction. When traditional third-party financing is utilized, the services of a closing company are used to finalize the real estate deal. Using this method can take up to 30 days to complete a real estate transaction. When a buyer and seller agree to use a land contract, the closing can happen in as little as a day if they can agree on all the details. Closing costs may not have to be paid as with traditional third party financing. This could mean more money can be paid toward the principle. Many fees associated with traditional real estate transactions can be eliminated.
Financial Deception: Disadvantage Buyer And Seller
When individuals use a traditional third-party lender, there are a number of protections in place. A lender will go to great lengths to make certain a real estate transaction is legal. They will make certain all of the required paperwork necessary to validate a real estate transaction are signed and properly filed. When using a land contract, there is always a possibility that either a buyer or seller could accidentally do something illegal or just be careless. This lack of legal protection can make both buyers and sellers want to avoid getting involved with a land contract. Sellers have had a buyer sell their property to a third party without notifying them. Buyers have no legal protection if they get behind on payments. They could be evicted from the property immediately and have no legal remedy available to them.