Installment Contracts: What are they and when are they used?

Real estate installment contracts are a financing option that allows for periodic payments instead of a lump sum payment. Also known as a land contract, contract for deed, or contract for sale in the real estate industry. This type of contract can be low-cost and flexible for buyers who can’t qualify for a loan due to poor credit or low income.

Under this contract, the buyer pays the purchase price to the seller in installments over a specific period of time. The buyer takes immediate possession of the property while the seller retains legal title as security until the buyer has paid the contract in full. This arrangement is ideal when the buyer needs the property urgently, but doesn’t have enough funds to pay the full price upfront.

When should some use an installment contract used?

An installment contract can be an attractive option for several reasons, such as:

• The seller wants to extend recognition of capital gains over years for federal tax purposes.
• The seller is motivated to sell to the buyer.
• The buyer wants to use the land, but the seller doesn’t want to give up the title until the buyer pays in full.
• The buyer views fundraising for a pending land acquisition as preferable to fundraising to retire indebtedness for a completed acquisition.
• A government program to fund acquisitions of land or easements is looking to spread funding commitments over a multi-year term.

Special Clauses in Installment Contracts

Most installment contracts for real estate have a forfeiture clause. This means that if you fail to make the required payments, or don’t follow other important terms, you will lose your right to the property. The seller has the right to keep all payments and improvements made while the house is under contract. This differs from a mortgage loan, where the buyer keeps any equity in the house after forfeiture.

Another common term in an installment agreement is a balloon payment. This is when a buyer makes regular monthly payments for a specified period, but the remaining debt is due in one large payment. A balloon payment is usually at least twice the amount of the loan’s previous payments. If the value of your home decreases, or your financial situation deteriorates, you may not be able to sell or refinance before the final balloon payment is due.

Consult with an Experienced Real Estate Attorney

An installment contract provides both buyers and sellers with flexibility to negotiate terms. Spreading payments over time can benefit both parties. They can structure these terms in many ways to best suit their needs. If you’re considering an installment contract, contact the team at Danilson Law!

Jeremy

Hi, I'm Jeremy Danilson, a native Iowan and founder of Danilson Law.