How does a land contract work?

July 7, 2009 10:53 AM

Is buying a home on land contract or as a lease option ever a good idea?

For the last couple years I have been working diligently to clear up my formerly terrible credit. However, it will probably be a year or possibly two before it's in good enough shape to qualify for a mortgage, even with a cosigner.

The problem is, I have recently found out that I will probably need to move out of the house I'm renting in the next 6 months. I live in a very tight rental market. I am not finding any suitable rentals within my price range that are kid/pet friendly in this school district.

As I've been looking, I keep seeing listings for companies who are offering homes as a lease with option to buy, or on land contract. On the surface, this sounds like a good idea for someone like me. But if it was that easy, why don't most people buy homes this way instead of going through a regular bank?

Is this fundamentally a bad idea? Will I end up paying much more for the home, even if I buy it out with a bank mortgage in a couple years' time when my credit has recovered? Does buying a home this way remove any of the legal protections that one would normally get in a conventional home purchase? From what I understand, the biggest concern is that often the contract is written in a way that makes it very easy to lose the home and any money invested into it, for a multitude of reasons. But does this work well for people if the payments are always made on time?

I have not had much luck finding straight answers on the pitfalls of doing one of these deals. Google turns up a lot of real estate seminars and make money schemes, which makes me believe that maybe this isn't the greatest idea after all.

I know the answer to this question is probably "lawyer up beforehand", which is a stellar idea no matter what. But first, I'd like to know is if it's a waste of time to pursue looking for one of these homes in the first place. If it's feasible, I really need some good, legitimate resources to understand how a land contract (or lease with option to buy) should be structured and how it works and what I should be asking if I decide to go this route.

Any good or bad personal experiences are welcome, too. Also, if it matters, the state is Indiana.

posted by howrobotsaremade to work & money (6 answers total)

The late Bob Bruss was very keen on lease-options. Read his article on them to see if this will work for you. (He was a syndicated columnist. I read his column regularly in the Washington Post and he extolled lease-options there on many occasions.)
posted by TheRaven at 11:00 AM on July 7, 2009

We bought our house as a lease-option and it worked out fine. We just finished paying it off in January and it's a great feeling. We paid far less money than we would have with a mortgage, and paid it off more quickly too (13 years).

I would recommend this method of home-buying to anyone who doesn't have great credit and/or doesn't have a high enough income to qualifying for a good mortgage. Just make sure you have an easy-to-understand contract with clear terms and conditions.
posted by amyms at 11:32 AM on July 7, 2009

I bought a house on a land contract almost 30 years ago. I bought it from a good friend so I didn't worry too much about the pitfalls, but did have a lawyer look over the contract before I signed it.
posted by mareli at 12:05 PM on July 7, 2009

I think one of the main reasons it's rare is because a lot of sellers aren't interested in the hassle. It's fine on their end if the buyer pays up on time every time, but if they start to default, things get complicated. On the buyer's end, I'm not sure what it's like now, but back in the day it was common for a land contract to allow the seller to retake the property and keep all the payments thus far if a buyer defaulted, so that's worth watching out for. Be very clear about what your contract says about what happens if _______ happens.
posted by craven_morhead at 1:01 PM on July 7, 2009

Does buying a home this way remove any of the legal protections that one would normally get in a conventional home purchase? From what I understand, the biggest concern is that often the contract is written in a way that makes it very easy to lose the home and any money invested into it, for a multitude of reasons.

Check to what extent - if any - it will be regarded as an asset belonging to you before you've made the final payment. If you can't see yourself wanting to use the home as an asset for other borrowing in the foreseeable future, that may not be an issue for you.
posted by Lolie at 1:23 PM on July 7, 2009

Marked all as best, since my question was really um... a lot of questions. Thanks everyone!
posted by howrobotsaremade at 10:00 AM on July 8, 2009