Rachel RespondsSeptember 21, 2018

Land contracts sound like a great way to finance land purchases without a lot of cash up front.

Question:

Is there anything I should be careful of with land contracts?

Answer:

Land contracts--basically rent-to-own agreements to acquire farmland--can indeed help farmers purchase land without a down payment. But there are important things to understand if you are thinking about entering into a land contract.

First, because land contracts often include a forfeiture clause allowing the seller to cancel the contract if the buyer detauls, land contracts can contain a risk of losing everything if you fall on tough times and are unable to make a payment. Whether you are protected from that harsh consequence depends on where you live. Some states require land contracts to have protections similar to those found in a lease or mortgage, but those states are likely to also have qualifying requirements for entering into land contracts in the first place. Some states also require grace periods in case of default, where a buyer who has missed a payment can pay the remaining balance in a short period of time and then acquire the title themselves. In still other states, the buyer can recoup some of the payments they've made in the event of default. So, it's important to figure out what the laws are in your state. 

Second, like other leasing arrangements, parties will need to determine who pays for things, from improvements made to the porperty during the contract period to property taxes. Parties will need to address questions like what happens if the land is taken by the govenment, and whether the buyer can lease the land to someone else. As with leasing pactices, the best arrangements are those that reflect the communicated concerns and desires of both parties, and are memorialized into a written agreement.

FOR MORE INFORMATION: A sample land contract, and much more, can be found in Farms Commons' Financing Farmland with an Effective Land Contract: A Toolbox, a detailed step-by-step resource on the legal issues involved in entering into a land contract.

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