Seller Financing: An Alternative Land Contract Worth Considering

Have you or a client ever pondered buying land? Whether for building a future home or just as a buy-and-hold investment, many parcels of raw land are on the market at any given time. Those land listings not snatched by eager developers can end up lingering for sale, with once-eager listing agents losing enthusiasm and sellers growing anxious. 

One potential option worth considering, either for oneself or as counsel advising a buyer, is the concept of seller financing, which may also be called a land contract. Many of us recall this concept from our property law classes, but until recently I was unfamiliar with its real-world application.  

In 2019, I noticed that a land parcel near my mother’s home had been listed for sale for months. I knew I would be unable to gather enough funds for an all-cash purchase. Having recently purchased my primary home, I suspected getting approved for a traditional mortgage would be challenging. Weighing my options, I decided to ask the seller if he would consider a seller-financing arrangement. In this post, I share my experience with that process, including the pros and cons of the method I used. 

Benefits 

There are several key benefits of seller financing. For one, a buyer pays directly to the seller over a period of years until the purchase price is paid in full. There is no involvement of a lender or mortgage company, and the terms of the payments are set forth in a land contract between the seller and buyer. Such terms may include the purchase price, down payment, interest rate, payment schedule, period of years, late payment procedure, pre-payment rules, and late fees.  

In my case, the seller and I discussed aspects of the sale that were important to each of us. Then I drafted a customized contract memorializing the deal points. When drafted amicably, a land contract allows for both parties to feel good about the transaction. This is important because seller financing commits both buyer and seller to an ongoing relationship until the purchase price is paid in full. The seller must trust that the buyer will continue making payments, and the buyer must trust that the seller will not lose the land or sell it to someone else.  

Overall, from my experience, seller financing is best employed where: A buyer is unable to easily acquire a mortgage from a traditional lender, particularly on raw land; the seller has received minimal interest from other buyers; the purchase price is low enough to be reasonably paid off by the buyer within a one to- three-year timeframe; and the buyer has some familiarity with the area or with the seller.  

Payment Processing Companies 

Various payment processing companies, for a percentage fee, receive payments from a buyer and deposit the money with the seller. In my case, the seller and I initially decided to use a company for these services. However, we soon agreed to instead deliver and receive payments directly between ourselves and to maintain a running ledger of principal, interest, and remaining balance totals. We found this option gave us the opportunity for periodic face-to-face interactions, which helped us build a relationship of trust and respect.  

Types of Land Contracts 

Our contract was designed as a traditional land contract, where the seller keeps legal title while the buyer makes payments. Once the buyer pays off the purchase price in full, the transfer deed is then executed and recorded. Any breach by the parties would be resolved and potentially adjudicated as a breach-of-contract lawsuit. Another method of seller financing that provides more certainty to the buyer is an arrangement where the transfer deed is recorded at the outset of the deal simultaneously with a deed of trust, listing the seller as the lender. When the buyer pays the purchase price in full, then the deed of trust is released from title.  

In my case, I was residing out of town, away from the property. The seller, who lived near the property, was able to continue maintaining the property, watching for trespassers, and keeping the land in good condition. We both saw this as a win-win. 

Potential Negatives 

I was fortunate to establish a good working relationship with the seller over the three years it took me to pay the purchase price in full. Once paid off, I drafted and recorded the transfer deed at the county recording department, after paying the appropriate county excise taxes and transfer fee.  

In many ways, seller financing is an exercise in trust, as anything can happen to a buyer or seller’s financial, marital, or life circumstances throughout the financing term. Market conditions also change, making some terms (such as interest rates) that seemed fair at the outset suddenly seem less desirable. One way to combat this is by contracting for a shorter financing term; for example, one year instead of three years. 

Another issue can arise if the seller is making payments on an existing mortgage on the land. This increases the risk that the seller might lose the land to foreclosure during the period of the seller financing. The existing mortgage lender might also have various review and approval rights over the terms of the seller financing. In my case, the seller owned the land free and clear, which simplified the process. 

Due Diligence  

Other items of which to be aware include making sure you can use the land for the purpose you want. For instance, a buyer’s due diligence might include soil testing if a septic system will be required, a survey of the land to ascertain the boundaries and any encroachments; determining if title insurance is desired; and a Preliminary Title Report to review for any encumbrances. Finally, buyers might want to consider inquiring about an umbrella insurance policy.