some disadvantages in using a land contract on both the buyer and seller side.
From the buyer’s perspective:
Since the seller does not deliver a good marketable title until the buyer makes the final payment, the buyer must continue to make the payments even if there is some doubt that the seller will be able to perform at the end of the contract term. For example, the title could be in jeopardy if the seller places another mortgage or other encumbrances on the property during the period of the land contract.
The buyer may have some trouble getting the seller to deed the property at the end of the term. For example, if at the time of final payment the seller is missing or dead, the property could be tied up in probate.
During the life of the contract, liens could have arisen against the seller that would cloud the title.
The buyer could be restricted from assigning his or her interest in the land contract if a covenant against assignment exists.
There could be problems if the seller did not actually apply the buyer’s payments to the existing mortgage.
From the seller’s perspective:
In the event of a default, it could be time consuming and expensive to clear record title, especially if the buyer is in bankruptcy or is a nonresident.
The seller’s interest in the land contract is less salable than a mortgagee’s interest would be if the seller had chosen to sell under a purchase-money mortgage. (We’ll discuss purchase-money mortgages in a later unit.)
Since the land contract is indeed a contract, it is subject to differing interpretations, which allows for the prospect of disputes and lawsuits.
A land contract has several other names, including real estate contract, installment sales contract, agreement for deed, agreement to convey and contract for deed.
A land contract is not tied to a note. It is a complete financing contract in and of itself that is executed between a seller and a buyer. Under a land contract, a seller pledges to convey the title to the property at the time when the buyer completes whatever obligations the contract stipulates. Under the terms of the land contract, the buyer gets possession of the property and equitable title, while the seller holds legal title to the property and continues to be primarily liable for payment of any existing mortgage.
A land contract incorporates many of the same conditions as you would find in a mortgage, such as the names of the parties involved, the pledge of the property as collateral, a full legal description of the property, the terms and conditions for repaying the loan, the specific responsibilities of the borrower during the loan term and a statement that discusses the remedies in case of default.
However, a land contract is NOT a mortgage. Under a land contract, as we mentioned above, the sellers keep the title in their own name and the deed shows that the sellers still own the property. This gives some measure of added protection to the sellers in the event of a buyer default.