A land contract is essentially a lease-to-own arrangement where the buyer makes installment payments over a period of time. Once the final payment is made, title to the land is transferred to the buyer.
It’s all in the name
Land contracts are frequently referred to by many different names including contract for deed, installment land contract, long-term land contract, installment sale contract, bond for deed, and land sale contract. We’re using the name land contract throughout this guide. Regardless of the name, the attributes are the same.
There are really three phases to the land contract:
The parties discuss and decide on a price and a timeline for when the buyer makes installment payments. They put all the terms of the deal in an agreement and sign it, which is the actual land contract.
2. Physical possession
The buyer takes physical possession of the land, often having to put little or nothing down; however, the seller retains legal title throughout this phase, which runs until the buyer makes the final installment payment.
3. Transfer of legal title
After the buyer makes the final installment payment, the legal title transfers to the buyer. This is the third and final phase, and the buyer now officially owns the land.
Sometimes the timeline of a land contract covers a very long period of time—15, 25, or 30 years—similar to a mortgage. However, often the seller insists on a balloon payment at a particular time—often several years down the road—at which time the buyer must pay in full. If this is the case, the buyer may have to take out a loan or a mortgage to cover the balloon payment. Or, perhaps the farmer will have established a profitable farm operation by this time and will be able to afford the payment without a loan. That’s the ideal scenario.
Even though the buyer does not have title to the land during the second phase of the land contract, she is typically obligated to pay taxes, maintain the premises, and keep insurance. However, these are all things that can be negotiated between the buyer and the seller when crafting the land contract.