Drafting a Land Contract 101

By Adil Daudi, Esq.

As the banking industry continues to monitor with great strictness on who is a prime candidate for a mortgage, more and more people are turning towards an alternative method when it comes to purchasing real estate – a land contract.

A land contract is an agreement between the buyer and seller, whereby the seller provides financing to the buyer for the buyer to purchase the property on an agreed upon purchase price. Typically, once such an agreement is drafted, the buyer puts a minimal down-payment, and subsequently agrees to make monthly installments to the seller that goes towards the total purchase price; and after a certain period, the buyer is to make a balloon payment for the balance remaining. Under such an agreement, the seller continues to hold legal title to the property; however the buyer is entitled to possession of the home. It is only after the buyer pays the total purchase price that the seller transfers legal title over to the buyer.

As it remains difficult for people to be approved for mortgages, a land contract provides the buyer with the luxury of not having to go through a lending institution for financing. Therefore, if you are someone with a poor credit rating, you can still purchase a home through a land contract without your rating being reviewed, as the contract is strictly between the buyer and seller.
If you, or someone you know, are currently involved in a land contract transaction, or are on the verge of entering into one, it is always advised to consult with a professional attorney to make sure you have a sound agreement in place. However, as a starter, the following are three (3) commonly overlooked headings that often don’t get the attention they deserve in an agreement, but can cause substantial problems down the road.

1.    Names and Purchase Price: Too often people forget to include the names of the parties involved in the agreement. As important as it is, people tend to overlook this information. In addition to including the names of the parties, it is imperative to include, with clarity, the breakdown of the purchase price, including the down payment, monthly payments, interest rate, whether there is a balloon payment expected, and the term of years.

2.    Description: Another commonly overlooked heading is the description of the property being sold. Aside from the actual address of the property, it is highly advised to include the legal description of the property.

3.    Possession: Remember, throughout the period where the buyer is making payments to the seller, the seller has full legal title to the property; however the buyer has possession interest. Therefore, in order for the buyer to become the actual owner of the property, they must satisfy the terms of the contract and then receive title ownership from the seller.

4.    Utilities: Far too many people assume the buyer (or seller) will be paying for utilities. Having such a clause in your agreement will avoid future issues and will make it explicitly clear on whose responsibility it is. In the event the buyer fails to make consistent payments on its utility bills, the seller has the necessary evidence to prove it was the buyer’s responsibility; therefore the buyer must reimburse the seller for any payments made.

Despite the many advantages a land contract can offer, without the proper drafting it can just as easily be a disadvantageous document. It is therefore always advised to consult with a professional prior to signing any such contract. It is always better to seek counsel once and live with the peace of mind of knowing that the agreement is sound and drafted to serve your best interest.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at adil@josephlaw.net or (517) 381-2663.

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