By Attorney Attorney Amanda N. Sacks, Schloemer Law Firm, S.C.
Under Wisconsin law, land contracts are a seller-financing alternative to a traditional mortgage. Land contracts are often used for the sale of property to a family member. We also see land contracts being used occasionally for the sale of vacant land.
While there are some obvious benefits to land contracts, both parties should be careful about entering into a land contract, so they don’t end up in a costly legal battle. For example, a buyer can lose their entire investment if they default in their payments. Or a seller can end up having to take back their property after a buyer has trashed the house for years and stopped paying on the land contract.
What is a land contract sale?
A land contract is a contract between a seller and a buyer, where the seller finances the transaction. The buyer makes installment payments to the seller over time.
When is a land contract used?
Land contracts are typically used if a buyer has difficulty obtaining financing from a bank, if they do not have enough equity for a purchase, or if they are purchasing vacant land. Often, a family member may wish to sell a property to a younger family member who may be unable to get financing from a bank.
What terms are included in a land contract?
Land contract terms are flexible and are based on whatever the seller and buyer agree on. Terms include:
- Purchase price
- Down payment amount
- Interest rate
- Amortization period
- Balloon payment
- Prepayment rights
- Payment schedule
A land contract could be structured similar to a conventional mortgage with payments amortized and paid in equal installments over the term of the contract. For example, on a $200,000 loan with no down-payment at 3% interest, the buyer would pay $843.21 each month for 30 years.
Or, the land contract can be amortized over a longer period, but have a balloon payment after a few years. This allows the buyer some time to build their credit and refinance with a bank, and allows a seller to get paid off in a shorter period of time. For example, on a $200,000 loan with no down-payment at 3% interest amortized over 30 years with a balloon payment after 3 years, the buyer would pay $843.21 each month for 3 years, and then pay a final balloon payment of $187,931.46.
What happens if the buyer stops paying the land contract?
The land contract will be secured by the property being sold. If a buyer stops paying (i.e. defaults), the seller can pursue strict foreclosure. In a strict foreclosure, the seller takes the property back, and keeps the amounts paid under the land contract.
While this can be beneficial to a seller, a seller should be careful in deciding to enter into a land contract, especially if the sale is to a nonfamily member and a bank is unwilling to provide financing. If a bank sees loaning money to the buyer as being too risky, would you be comfortable loaning money to them? If they stop paying, you can get the property back, but you will likely have to hire an attorney to do so. And, if there are buildings on the property, the buyer may trash the buildings, and you are not guaranteed to get the property back in the same condition as you sold it.
Should a buyer enter into a land contract?
There are a couple of advantages for buyers:
- Potential lower down-payment.
- Flexible terms.
- Potentially lower interest rate than a bank.
There is one big disadvantage to land-contract financing for a buyer:
- Strict foreclosure. If a buyer defaults in payments, the seller can pursue strict foreclosure. A buyer can lose the property back to the seller, and the seller may keep all amounts already paid towards the property.
Should a seller enter into a land contract?
For a seller, land contracts can offer several advantages:
- Easier to sell the property to those with low or moderate incomes, or no or poor credit history. For example, a land contract can help a family member sell a property to a younger family member who may not yet be in a position to obtain financing.
- Income stream with interest over the term of the land contract.
- Ability to pursue strict foreclosure if the buyer defaults, meaning the seller can reclaim the property and keep amounts already paid.
- Installment payments may be beneficial from a tax perspective.
However, don’t forget the disadvantages:
- Payment of purchase price is delayed.
- Seller may have to foreclose and take the property back, and the buyer may have damaged the property.
If you are thinking of buying or selling on a land contract, seek legal advice early in the process. If you have questions about this article, please contact one of our real estate attorneys at 262-334-3471 or email us at [email protected].
Originally published: March 7, 2022.
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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action. If you need legal guidance, please contact us at 262-334-3471 or [email protected]