What Is a Land Sale Agreement?

A land-sale contract occurs when a landowner sells their property because it retains title to the property until the client pays the total purchase price. In a nutshell, it’s a seller-financing scenario in which the seller keeps possession of the land until it’s completely paid off. The buyer and seller’s agreement establishes the buyer’s rights during this time. During the payment period, the buyer usually acts as if she is the owner. She has the legal right to own and use the land, as well as the obligation to pay taxes and insurance. The purchaser defaults under the agreement and loses her right to acquire the property if she fails to make any regular payments.

In land-sale contracts, most states have laws that protect the buyer. In other words, if a payment is missed, the purchaser does not lose her whole stake in the land. Instead, the law recognizes the purchaser’s equitable interest in the ground as they make payments. You may be wondering, “How frequently do contingent offers fail to materialize?” You’ll be relieved to learn that the vast majority of home sales that are contracted close. According to statistics, 3.9 percent of real estate contracts fail for any reason, including an inadequate home inspection. This means that 96.1 percent of contracts are completed, which is a pretty good rate for any deal.

Key Elements of a Real Estate Purchase Agreement

A real estate purchase agreement describes the prices and parameters of real estate purchases and is an essential phase in the real estate process. From earnest money regulations to good disclosures, every aspect of the transaction is covered. The purpose is to safeguard both the buyer and the seller and ensure that everyone is on the same page. From one state to the next, purchase agreements can differ dramatically. In certain areas, deals are brief and function only to kick off the bargaining process. The purchase agreement will be a complete, legally enforceable contract. You could feel overwhelmed the first time you look over the purchase agreement for the property you want to buy or sell. The deal, which is frequently a lengthy document, may contain various unfamiliar phrases and concepts. Before you sign, make sure you fully comprehend these principles. These features explain how certain factors commonly found in purchase agreements affect both the buyer and the seller.

Identifying the Location as well as the Parties Involved: A purchase agreement must, first and foremost, define the property being acquired. It should include the property’s exact address and a detailed legal description. Additionally, the contract should include the seller’s and buyer’s identities. Buyers should specify whether they intend to act as joint tenants or tenants in common in the purchase agreement. Joint tenants have the right of survivorship; upon the death of one tenant, the property automatically passes to the remaining holder without going through probate. Each tenant owns a part of the property under tenancy in common. Commissions are not always equal and may be freely transferred to another tenant. In the majority of cases, tenants who live together classify their arrangement as joint tenancy. Terms & Conditions: The seller’s approved offer price, as well as the method by which it will be delivered, should be included in the purchase agreement. Paying in whole with money, a cash down payment plus a new mortgage, or some other arrangements, including an existing mortgage, are common approaches. The purchase agreement may include this information, or a financing addendum may be inserted to define the buyer’s down payment and lending status explicitly. Earnest money requirements are frequently included in purchase agreements. Earnest money is used to finalize a contract; rates vary depending on the transaction, but purchasers should anticipate paying at least $1,000. Some sellers may want to include stipulations stating that the earnest money would be forfeited if the deal falls through due to financial concerns. In other cases, if necessary conditions are not met, the earnest money is fully refundable to the buyer.Date of Closing and Fees: The purchase agreement should include the date of the sale’s closure, as well as a clause stating that any changes to the closing date must be agreed upon in writing. The buyer usually takes possession of the property on the specified closing date and time. Moreover, the closing date signifies transferring the property’s title from the seller to the buyer. This transfer could be documented in a bill of sale in the future. Closing fees should be included for both the seller and the buyer. These expenses—and who pays for them—can differ dramatically from one property to the next. Although the agent may agree to pay for closing, it is common for the buyer to cover all fees. Closing costs may be divided between the buyer and seller. This expense division should be specified in the purchase agreement.Special Assessments and Real Estate Taxes: Property taxes and other costs should be prorated as of the closing date. If taxes cannot be assessed right away or pushed back somehow, they can be addressed in an amendment. The seller must pay special assessments during or before closing.Classification of Homesteads: Homestead property is eligible for significant tax discounts in various states and municipalities. As a result, the purchase agreement specifies the aim of homesteading. A property cannot be classified as a homestead unless the owner or a qualifying relative occupies it. If a property is used for homestead purposes but is separated by a road, it may qualify for homestead categorization.

Types of Land Contracts

Installment Sale Land Contract

A very professional seller method known as an installment sale is one way to complete a land contract sale. The seller retains title or places it in escrow with a title company or an attorney in this scenario. The buyer makes installment fees to the seller but does not receive title to the property until the entire balance is paid.

Power of Sale

Wraparound contracts frequently include a clause authorizing the seller to sell the contract. This clause empowers a third party, referred to as a trustee, to sell the property on the seller’s behalf if the buyer defaults on the mortgage contract. When the buyer defaults on the mortgage, the trustee serves the buyer with a notice of default. This notice informs the buyer of the bankruptcy and provides a deadline by which they must make good on the arrears or risk losing the property.

Straight Contracts

A wraparound mortgage in which the buyer pays the seller the same amount as the seller pays on the underlying existing mortgage is referred to as a straight contract or mirror wrap mortgage because the buyer’s mortgage mirrors the underlying existing mortgage.

Wraparound Land Contracts

A wraparound or all-inclusive land contract is another method of executing a land contract. Wraparound land contracts create a new mortgage for the buyer that wraps around the seller’s existing mortgage, typically with a higher balance and monthly payment. The buyer makes installment payments to the seller based on the property’s selling price plus interest, just as they would have done with a bank mortgage. The seller transfers title to the property to the buyer and extends a mortgage, with the proceeds used to pay off the existing underlying mortgage. An all-inclusive trust deed (AITD) is a wraparound agreement in which the seller transfers the property to the buyer and retains a note. In this manner, the buyer makes payments on the notice to the seller, and the seller makes payments on the underlying mortgage, pocketing any difference.

How To Negotiate a Land Deal

Purchasing a piece of real estate is a two-way street. The seller proposes a price, and the buyer responds with a lower price or requests certain concessions. Negotiations continue until both parties see eye to eye and reach an agreement on the terms. Negotiations are successful if both the buyer and seller believe they got a good deal. There are several factors to consider when purchasing a property, the most important of which is what the land will be used for. Before you go to the negotiating table, consider what you want to get out of the land deal. What are your wants versus your needs, especially since the two are so dissimilar?  Here is a guide to help you get the best deal possible on the property you want to buy.

Step 1: Examine the house.

It’s possible that the asking price isn’t always the same as the purchasing price. After reviewing the present title of the land for sale, you may try to negotiate a lower price. Look at the vesting warranty deed and the assessment while reviewing the property. An act is primarily used to convey real estate property interests. People occasionally sell or transfer partial interests in real estate. Check the deed to determine if any easements or rights have been given to utilize the land without owning it. An appraisal can be requested by either the seller or the buyer. Request a comparable property survey from the appraiser.  Request a list of similar homes sold in the neighborhood and compare the prices to see whether the asking price for the house you want is realistic.

Step 2: Obtain a copy of the restrictions and covenants.

Ideally, you should hire a realtor and a real estate attorney familiar with restricted covenants and what you can and cannot build on that particular piece of land. Will you have to adjust the zoning depending on your needs? For example, suppose you wish to develop a retail business on a property that is designated for an industrial warehouse or office structure. In addition, zoning rules generally limit a building’s total height or mandate a particular number of parking places for a commercial establishment. Local people and other interested parties might be vocal in their opposition to zoning changes, which can be time-consuming and costly.

Step 3: Make a cost-benefit analysis.

Calculate all of the expenditures associated with restoring the land to the condition you desire. How much will it cost you to finish the property? That is the cost of getting the ground, the entitlement, the cost of building the foundation, the cost of marketing plans to develop it up if it is a retail space, plus the cost of securing any money? You should also set aside money for items like air conditioners, wall coverings, and other such expenses.

Step 4:  Get to Know Your Seller

The most important thing to do in every negotiation is to grasp the other party’s priorities. Ask them questions to learn about their priorities. It is not necessarily the most expensive option. Specific terms that are low value to you may be of great value to the seller; submit your offer with these terms highlighted.

Step 5: Share Your Research

Investors who conduct their due diligence are more likely to receive a positive response to an acceptable but lower offer from a seller. But don’t only conduct the research plan; communicate it positively. Make sure to provide genuine comparable sales in the area with the request and any justifications for why the target property might be priced higher or lower. A well-thought-out strategy will get you a long way.

Step 6: Keep in mind that it’s not only about the money.

When you’re offering less than full price, finding different ways to sweeten the sale can help inspire a seller. I’ve seen a significant deposit, closing date flexibility, and relaxing contingencies all work to the buyer’s advantage. If you want the property, sometimes all it takes is granting the sellers a grace period to stay in their house for a few days after the closing, which is a tiny concession.

FAQs

What are the drawbacks of signing a land contract?

Land contracts have some disadvantages, so buyers beware. A land contract is not a viable alternative if holding title is crucial to a buyer; the title does not instantly pass to the buyer in a land contract sale. Land contracts do not prohibit mortgages.

Is it necessary to hire an attorney to analyze a land contract?

Yes. For those looking to acquire or sell specific types of real estate, land contracts may be the best, or in some cases, the only option. Because real estate laws differ from state to state, you must use a local lawyer to design a land contract that includes terms and conditions that will allow you to take action to defend your interest if necessary.

What are the drawbacks of land contracts?

Regardless of how much money you invest into the property, the seller keeps ownership until you pay in full. If you fail to make any payments, the seller has the right to terminate the contract immediately and keep every penny you’ve paid (state laws vary on how this goes down).

A land contract is not a viable alternative if holding title is crucial to a buyer; the title does not instantly pass to the buyer in a land contract sale. Similarly, because the seller often has the title until the final payment is made, local authorities and inspection agencies may hold the seller accountable for any property upkeep issues. As a result, you must review the essential elements before signing an agreement to determine whether it is legal or not for you to have a smooth flow in having a land of your own.