Land Contract Versus Mortgage

By Steve Gillman - 2006

What is a land contract? It is a contract used when selling a property on payments, also called a "contract for deed," and other names in different areas of the country. This is basic seller financing. The buyer wants an easy way to buy, you want the interest, so you take payments on the property.

However, a land contract is not quite the same as a mortgage loan. You sign a contract, and the buyer takes possession of you land or home, but you do not deliver the deed until every last payment is made. That may sound safer than handing over the deed and taking back a mortgage, but it isn't necessarily. In fact, it can be more dangerous.

Which is it in your case? You'll have to ask a good real estate attorney. The laws are different in different areas. In either case you have a clear legal path to take back the property if the buyer defaults on the payments. However, the process may not be the same. Years ago, where I lived in Michigan, the time it took to foreclose and get the property back was about the same for either the land contract or mortgage, so the two seemed about equally safe.

An attorney told me, however, that because the two are sometimes handled by different courts, the time difference can be greater. In some southern Michigan counties it took six months to foreclose on a mortgage, but two years for a land contract. The lesson? Find out which takes longer where you are. You don't want a non-paying buyer to sit in your house for years.

More about Land Contracts

What are the other advantages and disadvantages of each way you can structure the deal? Well, ask an attorney in your area, but a land contract can be easier to draw up. There are plenty of preprinted forms for this. Also, a buyer may feel more inclined to keep current on the property if he doesn't actually have the deed to it. The other advantages go to the mortgage though?

Why? These are lessons learned the hard way. I've sold several pieces of property on land contracts. The first lesson came in the form of a notice from the township that said I had fifteen days to clean up the junk cars in the yard of a small rental house or pay a minimum $500 fine. I had sold the property years before, but even though the tax bills went to the new owner, I was ultimately responsible for the property in their view, since the deed wouldn't transfer to him for several more years.

I couldn't even talk to the renters, since I was no longer the landlord. After a couple calls to the new owner, to remind him to call the renter, the cars were eventually moved - and just in time. The lesson? Be aware that you are still responsible for the property until the deed is signed over.

Another lesson about the dangers of a land contract came in the mail last month. We had sold our home in Michigan on a land contract, and the buyer was behind on taxes, according to the notice from the county. Fortunately he paid them after I hinted at the possibility of foreclosure, and this is a problem you can face with a mortgage too, but that wasn't the end of it. I soon got a letter in the mail offering to lend me money to pay those "back taxes." Apparently they send this to the name on the title - and I don't know if this means those late taxes can show up on my credit report. Hmm...

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