A land contract is a type of seller financing. It works a bit like a mortgage, but instead of a bank providing financing, the seller finances the sale of real estate in periodic installments. The buyer is usually permitted to move into the property as soon as the contract is signed, but he does not get legal title to the property until he completes payments. Indiana has modified traditional land contract law to make it fairer to the buyer.
Freedom to Negotiate Payment Terms
A buyer may seek seller financing if he is unable to obtain credit or cannot afford a down payment. Rather than lose the buyer, the seller might agree to sell it on contract. Payment terms under a land contract are typically more flexible than with third-party financing, although they are not required to be. Many sellers will agree to forego a down payment, for example, in exchange for a higher purchase price. The parties have broad freedom to negotiate terms under Indiana contact law.
Buyer Gets Immediate Possession, But Not the Title
The buyer is typically entitled to possession of the property as soon as he signs the contract, as soon as he tenders a down payment or as soon as he pays the first periodic installment. After that, the seller has no more right to enter the property than a landlord has to enter rented property. However, legal title to the property stays with the seller until the buyer makes the last scheduled payment. The seller also keeps physical possession of the title deed. This stops the buyer from trying to sell or finance proeprty that he does not yet fully own. When the buyer makes the last payment, the seller is obligated to assist the buyer in transferring title.
What Happens if the Buyer Cannot Pay
The biggest drawback with land contracts is what happens if the buyer cannot pay. Previously, a buyer who defaulted would lose his entire investment, and the seller could seize the property without going through foreclosure procedures. So, even if the buyer made 99 payments and missed just one, he could lose everything. Indiana has reformed its laws to remedy the situation where a buyer defaults after completing many payments. If the buyer's equity in the property at the time of default is "significant," as defined by the law, the seller must start formal foreclosure procedures in court instead of just taking the property back. The buyer is entitled to compensation for accumulated equity before the seller can repossess the property.
The SAFE Act
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the "SAFE act") requires states to pass legislation requiring licensing for real estate loan originators. Indiana's SAFE act went into effect in June 2010. It requires parties that extend financing for the purchase of real estate, including sellers under land contracts, to be licensed. The licensing process is expensive and time-consuming. You don't need to obtain a license, however, if you sell a home you previously lived in, sell property to an immediate relative, or sell commercial buildings.