Land Contracts - Land Sales Contracts - Caution
With a few exceptions, a real property land contract is an instrument by which the seller (vendor) agrees to convey title to real property after the buyer (vendee) has met certain conditions specified in the contract and does not require conveyance within one year.
Historically, the primary advantage of land contracts for a seller was the ease with which the seller could eliminate the purchaser's interest in the property in the event of a default. This advantage has been weakened by various courts over time.
When selling land under a land sales contract which is not recorded, the seller is prohibited from otherwise encumbering the parcel for an amount exceeding the amount due under the land contract without the written consent of the purchaser.
A land sales contract must include the number of years to complete payment and, if a tax estimate is made, the basis for it.
When selling land under a land sales contract, the seller must apply installment payments first to payment(s) due on obligation(s) secured by the property. The seller must hold in trust all payments received for taxes and insurance and use those funds only for those purposes, unless the payor and the holder of an encumbrance on the property agree to some other use of those funds. A land sales contract for purchase of property in a subdivision must set forth the legal description of the property, all of the existing encumbrances at the date of the contract, and the terms of the contract.
Disadvantages to the buyer. The disadvantages of a land sales contract to the buyer are:
- The contract may include provisions restricting its assignment or transfer.
- Most financial institutions regard a land contract as poor collateral.
- The buyer has no assurance that the seller has good title at the time the contract is made and the buyer cannot rescind the contract for this reason.
- If, prior to full performance by the buyer and conveyance by grant deed, the seller is:
- Adjudicated a bankrupt;
- Dies, with title passing to heirs; or
- Is adjudicated an incompetent.
the buyer can expect time-consuming, frustrating, and expensive litigation before obtaining a deed and policy of title insurance.
- After full performance, the buyer may receive defective title or no title at all, although generally the land contract will require delivery of a policy of title insurance.
For the reasons stated, we do not recommend that buyers acquire property utilizing a land sales contract. Please read the article on avoiding fraud in land acquisition transactions.