In comparison to mortgages and Trust Deeds, a land contract is a relatively straightforward legal instrument, but that doesn’t mean you should manage one with any less attention to detail. Unlike a mortgage or Deed of Trust, a land contract is usually a private affair between the property seller and buyer. Like any private contract, you should employ a lawyer to supervise the entire process and exercise due diligence in other ways, performing inspections and other actions that ensure that everyone involved knows exactly what they’re getting into. And just as in the case of a seller-managed mortgage, the seller needs to make sure they’ve picked someone they can trust to make regular payments.

Land contract terms can be very flexible, but they usually call for a down payment followed by regular monthly payments. The parties involved can also agree to a balloon payment to take care of the remainder. This is a lump sum due at the end of monthly payments. The borrower should be prepared to save up and pay this out when it’s due, but when he does he benefits from reduced interest, since that would normally be dispersed across a number of smaller monthly payments.

A land contract is much like a “rent to own” deal, and that’s what really sets it apart from a mortgage or Deed of Trust. Unlike those two instruments, the seller holds the title right up to the point where it’s been paid in full. Compare this to a mortgage (title held by the borrower) and Trust Deed (title held by a trustee).

Due to the nature of land contracts they can be stacked with other instruments. For example, the seller can arrange a land contract on a property for which he possesses a mortgage. In this case, the property buyer must be confident that the seller is making his payments – often using money from the buyer’s monthly land contract payments. If the seller isn’t keeping up with any additional encumbrances this could spell trouble. At the end of the payment period the buyer might not own the property – its title’s been seized by the mortgage holder!

This is why it’s vitally important to properly draw and file all land contract papers, so that the circumstances around the contract, including any encumbrances, and so that in the event of a dispute there is ample evidence of the contract and clearly drawn terms that enable a third party to sort things out. But even the best land contract might not be suitable for the seller after a financial emergency or if the seller just wants to simplify day to day living.