Rochester Real Estate Lawyer Explains the Risks of Land Contracts
- Because they may not close for four or five years, land contracts are like installment sales – and are fraught with drawbacks for both buyer and seller. Some buyers are bad credit risks and must buy under a land contract because the deed remains in the seller’s name and isn’t transferred to the buyer until they can qualify for a mortgage – or time passes and the buyer has paid into it.
- As the seller, even if buyers fail to make payments, you can’t evict them because it’s not a landlord-tenant relationship. A better alternative is an option to buy the property where a portion of the rent may be applied toward the purchase price. An option to purchase is completely different from a land contract or installment contract.
- For a buyer, a land contract is very risky because of the risk that, when the closing is scheduled, the seller may not be able to deliver clear title. It would be wise to have the titled checked before making the down payment
- The process is like two closings because the attorney will initially check out the title when a land contract is signed and repeat the process when the final payment is made because all sorts of things can happen to the seller in between – such as a divorce or judgments that create general liens against property. f the seller is successfully sued and a judgment is entered against them, their property is subject to a lien for 10 years. They may go bankrupt, become incompetent – or even sell the property to someone else.
- A buyer might prefer to have the seller hold a mortgage. Then, the title’s in the buyer’s name and the seller has a lien on the property. Before a seller commits to holding a mortgage, the contract should state that the buyer will provide a credit application and satisfactory credit reports – and a substantial down payment that would cover any potential foreclosure costs.