How a Land Contract Works

Why Home Buyers Like Land Contracts

contracts were very popular in the late 1970s and early 1980s. Back then, installment sale contracts, sometimes called contracts for deed, offered more attractive financing terms over the higher rates and rigid qualification standards of institutional lenders.
Land contracts began to disappear when loan requirements softened and rates dropped below 8%. But they have not vanished all together and, in fact, tiptoed back into the market in 2006.

What is an Installment Sale Land Contract?

Land contracts or contracts for deed are a security agreement between a seller, called a Vendor, and a buyer, called a Vendee.
The Vendor agrees to sell a property by financing the purchase for the Vendee.
The Vendor retains legal title and the Vendee receives equitable title.

The owner-carried financing can include an existing mortgage balance or the property can be free and clear.
Upon payment in full, the Vendor hands the Vendee a deed to the property.

All-Inclusive (Wrap-Around) Land Contracts

Wrap-around contracts contain an existing mortgage.
The Vendee makes one payment to the Vendor.
Upon receipt of the payment, the Vendor pays the underlying lender's payment and keeps the rest.
If the existing mortgage has a lower interest rate than the rate on the contract, the Vendor earns extra interest on money that does not belong to the Vendor.

This is how it works.

Say the sales price is $100,000.
The Vendee puts down $10,000.
The Vendee agrees to make payments on $90,000, bearing interest at 6.5%, payable $567.
The existing underlying loan is $50,000, payable at 5% interest with a payment of $268.
The Vendor earns 6.5% interest on $40,000 of equity, PLUS 1.5% interest on the existing mortgage of $50,000 and pockets $299 a month.