Monday, May 16, 2016

Land Contracts

One of the oldest get-rich-quick in real estate techniques has been in the news a whole lot lately.  And the news is all bad.

Land contracts, also known as contracts for deed, is the much maligned device.

Unlike a traditional mortgage where you get a deed at the time of sale expressing an ownership interest in a property, under a land contract you make payments to a seller for years and after the final payment you finally receive a deed reflecting ownership.

There is nothing inherently illegal or immoral about land contracts except the fact they have a long history of abuse by crooked sellers.  How they get away with it is obvious.  The moment the buyer misses a payment and is in default, they lose their rights to a deed.  Often the properties sold under land contracts are poorly maintained and offered to credit and cash poor buyers at widely inflated prices.  These sellers know from the start a buyer default is inevitable which allows them to sell the same property again and again and again.

Like I said, land contracts have been in the news a great deal lately.  Here are just a few headlines.

Predatory land contracts take advantage of low-income homebuyers

‘Contract for Deed’ Lending Gets Federal Scrutiny

As the articles above make clear, land contracts are commonly abused and should be avoided at all costs.  There are ways of using them with some safety, for example, having a fully executed deed placed with an escrow company or third party pending receipt of the final payment from the buyer but even these solutions are often unworkable and leave the buyer who has faithfully made every payment without proof of ownership.

Overall, if a land contract is the only way you can buy a home delay buying one.

Instead, offer to pay a higher interest rate or give better terms to the seller under a traditional sales contract.

Land contracts can work but often do not.  They are a real estate purchasing device best left alone for most potential homeowners.

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