If you can't secure conventional financing for a new home or piece of property, purchasing real estate on a land contract might seem like your best bet. While there are great advantages that come along with land contract purchases, there are some legal implications that you may not understand unless you hire an attorney. You see, when you purchase a home the traditional way, by working with a real estate agent and securing conventional financing, there are multiple real estate and financing professionals working for your best interests. When you purchase on land contract, it's just you and the buyer. You have to be more diligent. Following are four legal and financial pitfalls to avoid.
Being Taken Advantage of
Traditionally, a real estate appraisal is required in order for you to secure conventional financing because they want to make sure that the home is worth what you're paying for it. When you purchase property on a land contract, however, there is no such requirement. If you go into the contract without having an appraisal performed on the home, you run the risk of owing more on your home than it's worth, which is referred to as being upside down.
Problems with Existing Mortgage
When you purchase a home on land contract, you get the deed to the property after you have made all payments. In the meantime, the seller still owns the property and may be making mortgage payments on the property. If the seller stops making payments or fails to pay property taxes, the property could go into foreclosure, putting you out on the street.
Hidden Debts and Fees
If the seller of the property owes someone money, they can petition the court to place a lien on the home. A lien is attached to the property, not to the seller. If the seller refuses to pay off the lien, you may end up paying it yourself or losing the property.
Ignorance of Legal Implications
Some mortgages are drafted so that they will go into automatic default if the seller enters into a land contract. Others have clauses that make the entire mortgage balance due if the property is sold or placed on land contract. If the seller is ignorant of these requirements, you may have to stand by and watch the bank take control of the property that you just bought.
There are many ways, legally and financially, that a land contract purchase can go bad. In order to avoid the pitfalls, hire a real estate lawyer before you sign anything. An attorney can help you find any potential issues before they become problems.Share