Land Contracts (also called a contract for deed, installment contract, or a contract sale) appear to have gained popularity in the Champaign, IL real estate market, at least for now. In my most recent market report, I noted that 8 contract sales closed in April; compared to the usual 1 or 2, if any, that we see in most months, 8 is a significant number.
What is a land contract?
In a land contract agreement, the seller provides financing to the buyer. The seller retains title to the property, but the buyer takes possession and has what is called “equitable title” to the property while making monthly payments to the seller. Often the contract will only extend for a period of time (it may be 6 months, or 2 years, or longer) and at the end of that time, the buyer must pay the balance of the loan in full. Usually the buyer will refinance the remaining balance due, and once the terms of the contract have been met, the buyer is given the deed to the property.
These contract sales are sometimes used when the buyer doesn’t yet qualify for a traditional loan, but likely will in the near future. Sellers would usually prefer to sell the home outright, but if the home sits on the market for long enough, the seller may consider a contract sale in order to get the home off the market quickly and have an income to cover the expense of the home. Other times an investor will purchase a property having prearranged to resell it immediately in a contract sale.
Why are we seeing more contract sales lately?
Traditional financing is not easy to obtain these days, and homes are taking longer to sell, in general. In my opinion, contract sales have entered the picture as a direct result of these circumstances. It's likely, too, that contract sales may have been used to help some borderline buyers take advantage of the first-time homebuyer's tax credit. The next several months of data should tell us more...
Are there risks involved with a land contract?
Yes. There’s always the chance that the buyer or seller could default on the contract. When dealing with a land contract, it’s extremely important to hire a good attorney to draw up or review the contract and protect your interests, whether you’re the buyer or the seller. Other things to consider doing are having the property appraised, purchasing title insurance, and doing a credit check and income verification on the buyer.
If a land contract is something you're considering, you should talk to a real estate agent in your area. That person can help you determine the feasibility of such a scenario in your local market, as well as discuss the risks and help you decide if a land contract makes sense for you in your situation.