how to buy a house on contract

A land contract allows a buyer who is not able to secure traditional financing to purchase .
Land contract agreements must cover myriad issues, such as what happens if the market appreciates or depreciates dramatically prior to the due date of the balloon payment.
Like everything else about a land contract, the issue of alterations to the home must be agreed upon in advance so that the seller is not left with a home that he will have to make major repairs to in order to put back on the market.
If, for any reason, the seller does not make regular payments, the property can be foreclosed upon, leaving the buyer with a worthless contract and no home.
If he spends years making changes that suit him, only to fail to secure a loan when the balloon payment comes due, the seller is left with an altered home and little recourse.
If the buyer is unwilling or unable to make the balloon payment, the property still belongs to the seller and he can do with it as he chooses.
A land contract can attract buyers who would not normally have been able to purchase property.
Perhaps even more complex than a standard home purchase, a land contract has special challenges, and careful consideration must go into creating the binding contract.

Have your agent write up an offer, stating that you will make a minimum down payment (all you presently have, but still minimum) directly to the seller, and that you will make regular (monthly? interest payments (at a substantially higher rate than the seller could get at a bank) on the land contract.
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You will make periodic principal reduction payments as you are able, and will completely pay off the balance on the land contract in a short period of time: 3-5 years.
“I’ve seen a fairly dramatic increase in the number of people who are needing to sell their home via land contract or lease option,” Keller Williams agent Ron Hudson said.
“You don’t have land contract police,” Leyrer said.
While land contracts open the door to home ownership for some who otherwise would be locked out, they need to be entered into with caution by buyers and sellers, said Pava Leyrer, president of Heritage National Mortgage in Grandville and past president of the Michigan Mortgage Brokers Association.
“My credit isn’t very good because of student loans from before, and my wife just doesn’t have much credit,” said Neil, 26, who recently finished up active duty in the U.S. Air Force and now is back at school and a member of the Air National Guard.
The Grand Rapids PressSarah Matthew-Neil, Paul Neil and their daughter, Mia, stand in a bedroom of the Grand Rapids home they are buying on a land contract through Priority Real Estate.
Those in the real estate industry say land contracts are becoming a frequent way to close a deal because lending restrictions are tightening while many people’s credit ratings have been battered and bruised by the recession.
Lehman recalled one of her clients who thought she found a great deal when she signed a land contract to buy a home for $50,000 at 8 percent interest with a monthly payment of only $350.
Lease-to-own contracts (LTOs) and land contracts (LCs) are different legal ways to accomplish the same objective: transferring occupancy of a property from an existing owner who no longer wishes to occupy it to someone else who does want to occupy it, but who cannot afford to purchase it outright – usually because they can’t qualify for the financing required.
On the other hand, the buyer who is not sure of his capacity to complete the transaction might prefer an LTO, where failure means loss of the purchase option and the monies paid, but nothing else.
·        The appraisal will probably be higher in the LC transaction because the option price sets a de facto ceiling in the LTO deal.
·        The down payment on an LC gives the borrower some equity at the outset, which the option fee does not.
·        Closing costs are lower on a refinance than on a purchase mortgage.
In addition, the seller with serious reservations about the capacity of a potential buyer to fulfill the terms of the deal might prefer an LTO because it is easier to get rid of a tenant than an owner.
Variations include seller financing (you'd receive the deed and the owner would finance), contract for deed (the seller would hold the deed until you'd met certain agreed-upon requirements), lease-option (in which you'd lease the property, having the option to purchase it in the future), lease-purchase (in which you'd lease the property, while also having a legally binding purchase agreement), and a number of other ways.
Also called a lease-to-own house, the process works similarly to a car lease: Renters pay a certain amount each month to live in the house, and at the end of a set period — generally within three years — they have the option to buy the house.
Sellers who have already bought a new house will have relief from paying two mortgages at once, and in a slow housing market with many homes for sale, this may be their best option.
Siddons, Sarah, and Chris Opfer.  "How Rent-to-own Homes Work"  16 July 2008.  HowStuffWorks.com. < ;  18 October 2014.
Note, however, that some states have laws providing that if a buyer makes a majority of the payments under a land contract (total of all payments which cover a large percentage of a purchase price of the property), the seller may not be able to keep or refuse to transfer the deed if the buyer can make payments on the contract price at a later date (known as the right of redemption).
Also, because the buyer and seller privately negotiate and reach their own sales terms, the contract can reflect any arrangement comfortable between the parties: the contract can call for smaller monthly payments; a varying payment or interest rate as outlined in the contract; or a balloon payment or lump sum payment to pay the balance of the purchase price for the property.
Also, real property sold on a land contract can often be priced slightly higher than a sale with bank financing, since the seller provides the all-important financing and the buyer is often times not required to come up with a large down-payment, thereby permitting a higher asking price for the property.
If the seller does not payoff the existing mortgages before the time the buyer pays off the entire purchase price outlined in the Land Contract, the transfer of the deed can become an issue as there still is a claim to the deed from the seller’s original mortgage.
If the buyer misses any payment under a land contract, he or she may lose claim to ownership of the property (the right to have the deed transferred to him) and the seller may keep the money paid up to that point as ‘rent’.
The land contract can call for transfer of the property once the seller has received all of the required payments, or can call for the transfer at some time sooner with the seller then holding a mortgage on the property to ensure that the balance of the purchase price will be paid in full.
The seller and buyer enter into a contract that normally states that the seller shall transfer ownership of the property to the buyer after he or she has fully paid the seller the agreed upon purchase price.
Selling property through a land contract can provide a quicker and less expensive way for the property owner to sell the property: the seller does not need to comply with the often rigid and tedious guidelines of bank financing or the delays that often accompany those guidelines, or pay the fees associated with loan closing costs.
The buyer should determine in advance whether or not any mortgages exist on the property being purchased, and then require by contract that the seller to pay off all mortgages prior to the final payment being made on the contract, with penalties should the seller fail to do so.
Another disadvantage for the buyer can be found when the seller has an existing mortgage on the property that the buyer is purchasing by Land Contract.
Whatever the terms agreed upon for transferring ownership, when the agreed upon transfer date is reached, the seller tenders (or gives) a deed to the property to the buyer who then records the deed in the county recorder’s office or the real property office of the county where the property is located.
(In some states, this period is called "escrow.") During this time period, you and the seller will be working hard to meet or remove the various contingencies, for example, by securing a loan and scheduling inspections, and will advise the other party of progress being made.
As a result, sellers now tend to favor buyers who can make all-cash offers, leave out the financing contingency (perhaps knowing that, in a pinch, they could borrow from family until they succeed in getting a loan), or at least prove to the sellers’ satisfaction that they’re solid candidates to successfully receive the loan.
A financing contingency is also common, making the sale contingent upon you, the buyer, securing an acceptable loan or other financing with which to buy the house.
Likewise, you can request that the deal be made contingent on your successfully selling your house; but in a slow market, where it might take you months to sell, the seller is liable to balk at this.
For example, the seller might ask that the deal be made contingent on his or her successfully buying another house.
Do not forget the normal inspections as many people who offer these types of deals have serious problems with the home and you get stuck or when you discover them it is too late and many walk away loosing deposits and down payments as well.
Get the inspections done as well as an appraisal so you know what you are buying and have the contract for deed signed and witnessed by a notary so if the owner lets it fall into then you could sue them for your losses.
These transactions have some variations depending on state rules and the contents of the legal agreement, but a rent-to-own (or lease-purchase) transaction often means the buyer rents from the owner for a set period of time, after which the buyer agrees to purchase the property.
Also, the price of the property might be agreed upon at the time of the agreement, but mortgage rates can still increase by the time the buyer becomes eligible and exercises the lease purchase or lease option.
Mark Colwell, a Redfin real estate agent and real estate investor in San Francisco, has entered into several lease-option transactions and says the arrangement gave him more time to consider his financing options.
"Depending upon the state, [a tenant who moves out] may still have an interest in the property that can impair title to the property," Ernsberger says.
"It could be a house in a neighborhood that you really want to settle in but for whatever reason you can’t qualify to buy a home," says Barry Zigas, director of housing policy at the Consumer Federation of America.
"If you’re six months away from getting financing, this a way to tie up a property in today’s market and pay for it later at today’s price," Colwell says.
"Instead, you can qualify to rent one that you’d like to be able to buy in the future." Zigas says rent-to-own especially appeals to former homeowners who want to get back into ownership.
I would suggest using a Buyers Agent to assist in the transaction, close with a title company and make sure the contract is recorded with the county.
You should also have a title company assure there is a clear title, the person your are purchasing the house from is the owner and to record the proper documents with the county.
The bank, as owner of an underlying mortgage, has superior claim to the property, and can (and often will) boot out the land contract buyer with no recourse, even if they have been paying diligently every month.
In such a case, the theoretical way it works is that the seller collects a monthly payment from the land contract buyer, uses the proceeds to pay off his own underlying mortgage, and pockets the difference.
The other way to mitigate the risk is simply to avoid buying a property that has an underlying mortgage, and make sure the seller has clear title before purchasing it on land contract.
One of the biggest issues with land contract sales occurs when the seller still has an underlying mortgage with their own bank.
The bank does not recognize the land contract because they didn’t sign off on it, and often isn’t even aware that it exists—it’s simply a contract between buyer and seller.
Instead of trusting the seller to make their mortgage payments out of the money you give him every month, you can instead make two payments: One to the seller’s bank, essentially making the seller’s mortgage payments for them; and another to the seller directly, to make up the difference between your contracted payment and the amount that goes to the bank.
The sellers sued for breach of contract, arguing that any appraisal of $620,000 or more obligated the buyers to buy the house.
"In every contract, there are things that must be done within X number of days from the effective date: inspections, loan applications and approval, title searches," Marks says.
Who’s right? Florida’s Second District Court of Appeal favored the would-be buyers, ruling in April 2010: "In our view, ‘appraising for no less than $620,000’ means that no appraisal may be less than $620,000," the court ruled.
"In this case, it should have read, ‘This agreement is contingent, at buyers’ option, on the property appraising for at least $620,000 as determined by the appraiser for the buyers’ lender,’" he says.
The buyers argued that any appraisal for less than $620,000 allowed them to terminate the contract.
The purchase contract provided that the sale was "contingent upon this property appraising for no less than $620,000," according to court documents.
If the date passes and no financing has been secured, the sellers may terminate the contract and keep the earnest money deposit.
"You don’t want to mess with the government," Heimbichner warns, "because you’re going to get slapped." If your land contract contains an existing mortgage, you should seek the advice of a real estate lawyer.
Vendee makes a second payment to Vendor on $40,000 owner-carried financing, bearing interest at 6.5% and payable at $253 per month.
Lenders have had a long history of calling loans immediately due and payable if buyers took title "subject to" to the existing loans.
Vendee makes one payment of $268 on the existing loan balance of $50,000, bearing interest at 5%.
The existing underlying loan is $50,000, payable at 5% interest with a payment of $268.
The Vendee can agree to pay the existing lender directly and make another payment to the Vendor, or the Vendee can send one payment to the Vendor, and the Vendor will disburse payment to the underlying lender.
One of the biggest lawsuits from that period evolved from buyers taking title subject to existing mortgages held by federal savings and loan associations.
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.


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