An installment land contract (aka “contract for deed”) is an owner financing tool to buy or sell real estate. It works similar to the sale of a car, an arrangement in which the lender holds title under an sales agreement for collateral of payment. When the car is paid off, the title is passed to the borrower. Likewise, with an installment land contract the seller holds title to the property until the balance of the contract is paid off. The buyer lives in the property and makes the seller payments of principal and interest, plus taxes and insurance.
A good installment land contract agreement is crucial to the success of this agreement to avoid legal problems. When selling, the agreement should not be recorded, to prevent the buyer from claiming an equitable lien on the property (some states, notably Maryland, demand that the agreement is void unless recorded. Check with your county clerk). On the other hand, when buying you will want to record the agreement to protect your interest.
It is recommended, especially when buying, to have the seller execute a deed to the property to be held in escrow with a lawyer or title company. This will protect you in the case the seller disappears, dies, or refuses to convey title when you pay off the balance of the contract.
In Colorado, the law requires that the county public trustee be appointed for the collection of taxes. Texas law basically eliminates the use of a land contract to a buyer who will reside in the property.
- Is a Land Contract the Same as a Lease/Option? No, a lease/option is a landlord-tenant relationship combined with a purchase option in favor of the tenant.
- What Separate Disclosures are Required? A land contract is a SALE, which means all state and federal disclosures are applicable (e.g., lead paint).
- Who Gets the Interest Deduction? A land contract is a SALE, which means the buyer gets the deduction as “owner” (even though title has not passed).
- What if the Buyer Defaults? Depending on your state, it’s as easy as an eviction or as hard as a foreclosure. Some states have specific procedures for getting a buyer out of the property on a land contract. The language in your contract is crucial in this regard (which makes ours so good!).
- Can This Be Done on a Property That Already Has a Loan? Yes, this is called a “wrap” or “wraparound”.
- Do the SAFE Act Disclosures Apply to a Land Contract? This depends on your state law, but generally the answer is “Yes”.
- Are Land Contracts Legal in My State? Land contracts are legal in EVERY state, but the Texas the legislature has put so many restrictions on them that it is not worth the effort. Some states call it something else (e.g., “Bond for Deed” in Louisiana), but the practice has been done long before mortgages were around.
- What’s an AITD? An AITD is an ALL INCLUSIVE TRUST DEED or “wraparound mortgage”. It is also a wraparound, but the buyer gets title and the seller takes back a subordinate (second) mortgage for the all-inclusive payment. It is essential the same thing as a land contract, except that collateralization is different. These are more commonly used in California and Texas than land contracts.
Need an installment land contract or AITD form for your state? Contact us.