Buying homestead property is a pretty exciting adventure. Your dream may be ten acres of land, and you have big plans to build a cabin and a barn. But the bank may not share your vision. Thank goodness for land contracts.
Land contracts, also known as owner financing, mean that an individual or private land company sells you the property directly. You don’t go through a bank.
In this article, I’ll share the basics, as well as the pros and cons, of buying land using owner financing to help you get your hands on your dream property.
Ways To Buy Land
There are many ways to buy homestead property. You can go with a conventional mortgage, pay cash, or use a land contract option.
Getting a conventional mortgage means you take out a loan from a bank or lending institution. The cost and requirements may vary considerably based on your assets, location, and type of property.
It’s harder to get a loan for land with no buildings than an urban home in a nice neighborhood. That’s because the bank considers the resale value an important metric, and a home holds more value and resale potential than empty land.
To get this type of loan, you need to get approved by showing your credit score, work history, and income.
Okay, this is obviously easier said than done, but some people manage to save enough money to buy their dream farm outright. Sometimes potential homesteaders do this by renting an apartment in an urban area and work conventional jobs while saving money to finance the farm.
I totally admire them.
Obviously, if you can go this route, it’s a smart option financially. But it’s not within the grasp of every would-be homesteader.
There’s one disadvantage of paying cash. When you own your home outright, you don’t get to deduct any mortgage payment on your taxes. The government has incentives for homeowners who borrow money.
A land contract consists of a legal contract between a buyer and a seller. Instead of dealing with a financial institution, the buyer purchases the property from an individual or a small land company.
In a land contract, the seller holds the title to the property. The buyer has what is called an equitable title. This means the seller can’t sell the land out from under you, nor can they place a lien on the property.
When the buyer has paid for the property in full, then they receive the deed and file it within the county they live in. It’s also recommended that the buyer file a copy of the land contract with their county to show that they’re purchasing the property.
The Basics of a Land Contract
You may not have heard of land contracts; however, this concept is actually common with some other larger purchases. You may have seen car lots that advertise “buy here pay here.” That means mean they privately finance the car loan instead of going through a bank.
A land contract is the same idea, but for property instead of vehicles.
You might make a land contract with an individual selling off part of their farm (or possibly the whole thing).
Today, owner financing is also often done through land companies. These are persons with capital that buy up large tracts of land or farms. They then divide the land and sell off lots. These lots may be anywhere from one to 50 acres (and sometimes more).
Many land contracts are just that – land. Some may have a few outbuildings, and occasionally one may have a house on it. If it does, it’s typically a fixer-upper.
I have purchased two farms, one in Ohio and one in Kentucky, both on land contracts.
Ironically, both times I had what I thought was a stable position as a high school science and special education teacher. Not so. The banks said that since I was a single parent, I was a high-risk borrower.
So I looked for other options.
Pros of Land Contracts
Here are the pros of land contracts that I discovered along the way:
Easy to Finance
A land contract allows people who can’t get a bank loan to purchase a property. People that receive Social Security and disability can qualify for many owner financing deals. Low-income persons can often qualify, as well.
The land contract is the easiest way to finance a farm in terms of getting approved. Often, land contracts don’t require credit checks, or the owner won’t look at your finances as thoroughly as a bank will.
Frequently, it’s just a simple application where you list your job or another source of income.
Lower Down Payments
One of the hardest things with a conventional bank loan is coming up with a down payment. That’s the good faith money you pay upfront to secure the mortgage and can be up to 20% of the loan.
Owner financing typically has a lower down payment and these can be negotiated with the seller. You can also negotiate the length of the loan and the payment.
Banks often have many fees associated with their loans, such as closing fees, inspection fees, and origination fees.
When you have an owner financed contract many of these fees don’t apply.
Cons of Owner Financing
Sounds pretty good, right? It can be, but there can be drawbacks, as well.
In a traditional mortgage, the bank must follow certain rules regarding interest rates, truth in lending, and fair debt collection. These are all tightly regulated by the government.
These rules were put in place to protect buyers. In addition, anti-discrimination laws are in place to protect people of color and women.
None of that exists with land contracts. You have to do your own due diligence and protect yourself.
Control of Prices
In a land contract, the seller controls the price and interest rates. Many land companies do take advantage of this and charge above-average prices for land. It’s always a good idea when looking in an area to check out land prices from a variety of lenders.
For example, the land company I worked with has extremely high-interest rates. I was able to negotiate on that somewhat.
The Research is Up To You
When getting a land contract, the buyer needs to ascertain that the owner can sell the land legally, meaning they have a clear title. Also, you want to make sure there is a legal survey on file, and you know the boundaries.
You can run into serious trouble if an owner tries to sell land that’s under lien or that doesn’t have the boundaries that were promised.
These are all things you can do yourself for free; it just takes some time and effort. You need to go to the county courthouse where the land is located and look at the public records.
Furthermore, you need to understand what zoning regulations may apply to the property. Again you can call the county, specifically the zoning or planning department. This is critical if you want to build your own home, have alternative energy, or a composting toilet.
You may be under various zoning depending on the local, city, county, and/or state zoning may apply. In fact, in some areas, you may be subject to federal laws. For example, wetlands are protected and may have special zoning that prevents some construction.
Some people think that with a land contract, they can’t get foreclosed on. This is incorrect.
A sale through a land contract has the same consequences as a mortgage. If the buyer defaults on the loan, the seller may foreclose on the property. That means you could lose the property and any improvements such as a house or a barn.
In fact, you could have fewer protections against eviction and foreclosure than you do with a conventional loan.
How To Make a Land Contract Work For You
Ready to make owner financing a reality for you on the road to getting your dream homestead? Here are the steps:
Negotiate the Terms
Understand that the contract is negotiable. Buying land is a two-way street. If you’re buying from a land company, they will most likely have a standard contract.
You can negotiate a standard contract, and it’s advisable to get other opinions from a lawyer or real estate agent and have them review the proposal.
Consider Paying Off Early
This was my strategy to cut through the high interest. My payments were low, so my goal was to make two payments per month. It didn’t always happen, but when I did, I had the second payment go against the principle.
Also, I had a ten-year loan, which I paid off in six years. It pays to do without some extras to be able to own your property free and clear.
Roads and Driveways
When land companies purchase large tracts of land, they often need to make some improvements. New roads are often built so that the individual lots can be accessed. You want to investigate these roads.
If the property is on a county or state road, then it’s all good. The local government will take care of road repair and will probably shovel snow in the winter. However, if the road is private, there are several things you need to look into.
I live on gravel, dead-end, private road, which is great because there is no through traffic. However, road maintenance is an issue. Per the contracts, the land company is supposed to maintain the road.
My land company is extremely poor about doing road maintenance and another person who lives on the road takes care of scraping the ruts after every heavy rain. So make sure to discuss those things with the seller and get everything in writing!