As described in Wisegeek.com (2011), a land contract is between the buyer and a seller of a property, wherein the seller holds the title or deed to the property until all agreed payments have been made in full. Because the laws governing land contracts can vary from one state to another, it is important that the governing laws be consulted to understand the particular rules that control a specific scenario. The property at issue within a land contract may be improved or unimproved, vacant, or a home or a commercial building. A down payment is usually made, and then equal monthly instalments are paid until the property is paid for or until a balloon payment is required. A balloon payment is a lump sum of money that is due at a specified time, in this case at the end of the course of monthly payments.
A land contract can be compared to renting or leasing with the option to buy, though they are not entirely the same. Such options are different in that the agreement is usually filed and is a legal arrangement, giving the renter or lessee the option to buy the property at a prearranged time during the lending period. Rent payments then become equity in the property. Although in many places, it is legally required, a land contract may not always be recorded, making the legal recourse of the buyer tenuous should the agreement be flawed in some way. For example, if the seller still owes a mortgage on the property, the buyer assumes that the seller will use his monthly payments to pay the mortgage as well as any taxes or other liens, keeping the title free of encumbrances. If this occurs, the buyer owns the property free and clears at the end of the contract. If the seller does not keep up with payments owed, there could be trouble for the buyer. For this reason, getting the agreement in writing is important.
Reference
Wisegeek.com (2011). Land Contract. http://www.wisegeek.com/how-does-a-land-contract-work.htm
