Installment land contracts, or "contract-for-deed" deals, remove the mortgage lending institution from the transaction and allow a buyer and seller to work together directly. The seller is usually released from all obligations relating to the property (with the exception of his own mortgage, if there is one), including property taxes, homeowner's insurance, and association fees. However, no two deals are alike, so parties should carefully review their contract to review deal terms.
Basic Land Contract Terms
By retaining the deed, contract-for-deed sellers are offering a form of financing to the buyer. Deals are usually structured as 30-year notes, with a balloon payment due for the balance after 5 or 10 years. Down payments are often small, between 1 and 10 percent. After the contract term is up, if the buyer can't pay the balance in full, he secures a traditional mortgage as a refinance, with the payments he's made counted as equity. During the term, sellers earn monthly payments comprising principal and interest. Escrow may be established as well, and tax and insurance payments made by the buyer will be deposited into the account, with payments made automatically when bills become due. Alternatively, buyers may opt to pay tax and insurance bills independent of escrow.
Property Taxes, Insurance, Maintenance and Repairs
Sellers should be certain to have a written provision in the sale contract that states the buyer is responsible for payment of the property's taxes and insurance bills, preferably in an escrow account. The seller, as deed-holder, may ask to have a copy of the property tax bill and insurance policy, along with proof that the bills have been paid. In addition, as homeowner, the buyer is responsible for maintenance and repairs; this should be clearly stated as well.
Tax advantages can be significant for buyers and sellers. Although sellers no longer may claim the property tax deduction, they are able to spread out the capital gain from the sale of the home over the length of the contract term. Buyers are able to claim the mortgage interest as a deduction, as well as the property taxes -- income constraints may apply. They may also be able to claim any eligible capital-improvement projects; for example, if the buyer replaces old windows with new energy-efficient models.
Recording the Sale
Land contracts should be recorded with the county clerk's office immediately after signing. This paper trail will provide protection for both buyers and sellers. For example, if the buyer is late making payments on property taxes, having a deal recorded will show the court clear evidence as to who is liable for payment. Buyers and sellers would be wise to consider opening an escrow account for the dual purposes of paying taxes and insurance. Monthly payments are easier to manage, and bills are paid directly from escrow, eliminating the headache of remembering to make timely payments. Sellers can also rest easier knowing that these bills, critical to responsible homeownership, have been addressed.