Understand what a land contract is, how to navigate the process and which red flags you should look out for with a seller
So you’re thinking of buying a house in Detroit using a land contract. This guide will help you spot major red flags and navigate the do’s and the don’ts.
What exactly is a land contract, and why buy a house with one?
A land contract is a way to buy property that allows a buyer to pay the seller over an agreed amount of time.
Essentially a “seller-financed” mortgage, land contracts were most popular in America between the 1930s and 1960s, particularly in Black communities where redlining kept bank mortgages from Black potential homebuyers. Land contracts are still used if people want to buy a home but can’t qualify for a traditional loan because of income, credit issues or low property values.
In a land contract, the seller holds the deed (meaning they own the home) until the buyer makes enough payments. The buyer is still usually responsible for property taxes and upkeep of the home while making those payments. But, they are also not a tenant and can’t be evicted.
A land contract sounds like a great tool for someone struggling to get a traditional loan. What exactly is the issue?
Predatory sellers can easily manipulate land contracts. Some sellers in Detroit take advantage of the fact that land contracts don’t have a bank, title company or real estate agent reviewing the purchase.
But not to worry. This guide will help you figure out what you should look out for so you can avoid scams and sign a fair contract.
Is rent-to-own or lease-to-own a land contract?
No. Some buyers or sellers say a rent-to-own or lease-to-own deal is a land contract. Those agreements typically treat the buyer as a tenant and do not have the extra legal protection of a land contract. It is important to know if the agreement you have is a true land contract. Read below for language found in a real land contract.
The basic information that should be listed in a good land contract
• The address. This should include the property address and the correct legal description of the property’s lot and block number.
• The seller’s name. If this is a company, the person who signed should have the authority to do so. Check Michigan’s LARA business entity database to confirm the signer is a registered agent of a company.
• The buyer’s name. This can include more than one name.
• Confirmation of title. The document should spell out that the buyer gets an “equitable title” and will get a general warranty deed after all payments are made. That deed needs to be signed over by the seller to the buyer and filed with the Register of Deeds.
• Space for a notary to sign.
What to get in writing
• Purchase price. What is the total amount the buyer must pay before they can get the deed?
• Payments and length of a contract. Get all the expected costs in writing. What are the monthly payments and how many payments are needed to hit the purchase price? Is a down payment required? What about a “balloon payment” (which is a large extra final payment)?
• Interest rates. Some land contracts have monthly interest rates. Interest rates are added on top of monthly payments and cannot exceed 11% in Michigan. In 2021, the average interest rate was 2.96% for a 30-year fixed-rate traditional mortgage in the state.
• Final total price. If the sale comes with interest, the total amount you pay will be more than the purchase price. Make sure you know and understand what the final total price will be.
• Who is responsible for upkeep, property taxes and utilities? Normally, the buyer is responsible for these costs, but get it in writing. Before signing anything, find out if there are outstanding property taxes or utility bills. (More on how to do that in the Homework section of this guide.)
• Home Insurance. Many land contracts require the buyer or seller to have home insurance. The party responsible for paying the insurance should be in the contract.
• Forfeiture. The forfeiture clause explains how a buyer could default on the contract. Read this carefully. Some land contracts have an “Acceleration Clause” that requires the buyer to pay the full balance owed immediately if they default — be aware if your land contract has this.
Some sellers who have been sued for deceptive practices in land contracts:
• Detroit Leasing Inc. • Real TC LLC • Detroit Property Exchange Company • Latino Housing Coalition • Party City LC • Woodlawn Properties Inc • Chase Loan Services • Belmont Properties of Michigan • Detroit, MI LLC • Devonshire Hills LLC • Dobel Prize • Frenchy Sirois LLC • Gerard Brothers LLC • Montlieu LC.