The Installment Sale
Land Contract

The "Installment Sale Land Contract" or "Contract for Deed" was a popular way of financing the purchase or sale of a property in the late 1970's and early 1980's. It's likely with the contraction of the mortgage industry in late 2008 that installment sales will once again become a popular way to buy or sell a property. Increases in capital gains taxes could also provide an incentive to use this transfer method for selling property.

There are a few key reasons that Land Contracts may be beneficial:

• less stringent qualification to obtain financing than the banks are currently requiring



• reduction of taxable income by spreading the sale over a period of years



• potential for a better return to the seller than current yields on money market funds



• flexible down payment



• quick closing



• low closing costs



• if the property needs lots of repairs, banks may not approve a loan - a land contract doesn't have this limitation

There are two important caveats when considering selling your property via a Contract for Deed:

• if there is a mortgage against the property you can create a "wrap-around contract". But if the underlying note has a "due on sale" clause, the bank may call the note



• if the buyer defaults you will have to follow your State's foreclosure laws (in some States, like NY, foreclosure could take 6 months or more

Real estate lawyers generally will try to steer you away from this type of sale, but it is a good idea to involve an attorney.There are work arounds for many of these problems.

1. If you are creating a wrap-around contract transfer the property to a trust. For example, if I am buying a property on Main St. from John Smith, I have Smith transfer the property to "Smith Main St Trust" where my business is the beneficiary of the trust. I have used this many times and never had a bank exercise the "due on sale" clause. It is legal to transfer property to a trust and most banks assume the transfer is for estate planning purposes.



2. If you are buying the property you want to have the Contract for Deed recorded. If you are selling, it is better not to have the Deed recorded.



3. You probably should try to negotiate a balloon payment if you are selling in order to force the buyer to refinance and give you the remaining cash



4. If you are a buyer get a title search and title insurance



5. If you are the seller make sure you are named on the insurance policy



6. if you are a seller pull the credit report of the buyer

Land contracts can be a great way to buy or sell property and it's use will definitely increase during the current economic crisis.

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