A land contract, sometimes also called a "contract for deed" and other names, is a contract to sell real estate on payments. It is basic seller financing, in which the seller takes payments from the buyer rather than the buyer borrowing from a mortgage lender to pay cash. Many sellers find that by making it easier for the buyer in this way, they can get a higher price and good interest income.

How is it different from playing bank and putting a mortgage on the property? The primary difference is that the deed is not signed over to the buyer until after the last payment. With a mortgage, you give the buyer the deed and take back a mortgage, which then pledges the property as collateral for the money owed to you. But which is better?

That depends. In theory you have the same security in both cases, since there are clear procedures in the legal system for foreclosing on and taking back the property if the buyer defaults. However, the two types of contracts are sometimes handled in different courts. This can be important. Suppose, for example, that the court system which handles land contracts takes six months to process a foreclosure, but the one that processes mortgage foreclosures is chronically backlogged and takes two years. Do you want a non-paying buyer to live in your home for years?

The opposite to the above could be the case in your area, so ask a good real estate attorney before deciding which way to offer seller financing. Of course, if it takes years in both cases, reconsider the whole plan, especially if you will be relying on the income or taking a small down payment.

The Disadvantages Of Land Contracts

It may feel safer to keep the deed in your name, but that part isn't a real issue. As noted, there are procedures to get the property back in either case, so it's really only important which takes longer. But what if they are taking about the same amount of time? Having sold several properties on land contracts, I now think there may be some disadvantages when compared to taking back a mortgage.

My first lesson about this came a few years back when I was facing a $500 (or larger) fine for some junk cars in the yard of a small rental home. "But I sold the property years ago!" I protested to the township official. That's when I learned that they would hold me responsible for ANYTHING wrong with the property until I transferred the deed to the new owner. I had sold to him on a land contract, and he still had several more years to pay.

I would have marched down there and told the renter living there to get rid of the cars, but I had no right. The new owner was the landlord after all. I called him, called again to remind him, and he called the tenant, who moved the cars just before the fifteen-day deadline.

My most recent lesson came in the mail from the county where we sold our home two years ago. We sold it on a land contract, happy that we got 10% more by doing it this way. Now, however, the buyer hadn't paid the property taxes for a year. Again, a couple phone calls got this resolved, and this could happen if we had sold and taken back a mortgage too, but that wasn't the end of this matter. Just before the buyer paid up, I got a letter from a helpful finance company offering me a loan to pay those "back taxes" that they knew were late. Did the credit reporting companies know? Your guess is as good as mine, but I do know that if the deed were in the buyers name, it definitely wouldn't show on my credit report.