A land contract is a seller-financing agreement: the buyer pays you for the land in installments over months or years, and you keep legal title until the last payment is made. Only then do you sign the deed. The same arrangement is called a contract for deed, an installment land contract, or an installment sale contract, depending on the state.
You are the bank. That is the appeal, and it is also the risk.
One thing to clear up first, because the phrase is used two ways. People also say 'land contract' when they mean the ordinary purchase agreement used in a normal sale that closes in a few weeks. That is a different document, covered in our guide to the contract to sell land. This guide is about the financing kind.
How a land contract works, step by step
- You and the buyer agree on terms. Price, down payment, interest rate, length, monthly payment, and whether a balloon payment is due at some point.
- Both of you sign the contract. It should be drafted or reviewed by a real estate attorney in the state where the land sits. The rules differ a lot by state.
- The buyer pays the down payment and takes possession. From here the buyer normally uses the land and is responsible for property taxes and upkeep.
- The contract, or a short memorandum of it, is recorded with the county recorder.
- The buyer makes monthly payments to you. Some sellers hire a loan servicing company to collect payments and keep the records.
- When the balance reaches zero, you sign and deliver the deed. Now the buyer holds legal title.
There is no bank, no appraisal requirement and usually no lender underwriting. That is why land contracts are common for vacant land, which most conventional lenders will not finance.
A worked example, and the formula behind it
Say you sell a parcel for $50,000. The buyer puts $10,000 down and you finance $40,000 at 9% interest. The rate here is only an example. Yours is whatever you and the buyer agree to, within your state's usury limit.
| Term | Monthly payment | Total interest paid to you |
|---|---|---|
| 5 years (60 payments) | $830.33 | $9,820 |
| 10 years (120 payments) | $506.70 | $20,804 |
| 15 years (180 payments) | $405.71 | $33,027 |
Those payments come from the standard amortization formula, the same one any land contract calculator uses:
M = P × r ÷ (1 − (1 + r)^−n)
- M is the monthly payment
- P is the amount financed ($40,000)
- r is the monthly interest rate (9% ÷ 12 = 0.0075)
- n is the number of monthly payments (120 for ten years)
Run it for the ten-year row: $40,000 × 0.0075 = $300. Then 1.0075 raised to the power of −120 is about 0.4079, and 1 − 0.4079 = 0.5921. Finally $300 ÷ 0.5921 = $506.70.
To run your own numbers, swap in your balance, your rate divided by 12, and your number of payments.
Balloon payments
A balloon keeps the monthly payment low but ends the contract early. Payments are calculated as if the loan ran a long time, and the remaining balance comes due in one lump on a set date.
Using the example above: payments figured on a 15-year schedule are $405.71 a month. If the contract calls for a balloon after five years, the buyer has paid about $24,343 in payments and still owes roughly $32,027 on that date.
Most buyers plan to cover a balloon by refinancing. If they cannot get a loan, which is common with vacant land, you are looking at an extension or a default. A balloon is only as good as the buyer's realistic way of paying it.
Who holds title, and what 'equitable title' means
During the contract, ownership is split:
- You keep legal title. Your name stays on the deed in the county records.
- The buyer holds equitable title. That is the right to use the land now and to receive full ownership once the contract is paid.
In practice this means you cannot simply sell the land to someone else, and the buyer cannot be treated like a tenant you can remove at will. Each side holds a real interest in the property until the contract is either paid off or legally ended.
What happens if the buyer stops paying
This is where state law matters most. There are two broad routes.
Forfeiture (or cancellation). The contract ends, you keep the payments already made, and you take the land back. It is usually faster than foreclosure, but states attach notice and cure periods to it.
Foreclosure. Some states, or some courts once the buyer has paid in a meaningful share, require you to foreclose much like a mortgage lender would. That takes longer and costs more.
Two real examples show how different the rules are:
| State | What the statute requires |
|---|---|
| Michigan | Forfeiture is available only if the contract expressly provides for it (MCL 600.5726). The buyer gets written notice and 15 days to pay (MCL 600.5728). After a court judgment, the seller cannot get the land back for 90 days if the buyer has paid less than 50% of the price, or 6 months if the buyer has paid 50% or more (MCL 600.5744). |
| Minnesota | The seller serves a statutory notice and the contract for deed terminates 60 days after service unless the buyer cures the default and pays the required costs and fees (Minn. Stat. 559.21). |
Other states have their own timelines, and a few treat a land contract almost exactly like a mortgage. Confirm the process with an attorney in the state where the land is located before you sign, not after the first missed payment.
Recording the contract
A land contract, or a short memorandum of it, is normally recorded with the county recorder so the public record shows the buyer's interest. In Minnesota it is required: the buyer must record a contract for deed within four months, with a civil penalty for failing to (Minn. Stat. 507.235).
Sellers sometimes think leaving the contract unrecorded protects them. It mostly creates confusion later. Ask the county recorder what they will accept, since formatting and notary rules vary. For the rest of the documents in a land sale, see the paperwork needed to sell land.
Risks to the seller
- Default. You get the land back eventually, but you may wait months and pay legal fees to do it.
- Unpaid property taxes. The contract usually makes the buyer responsible, but the county's tax lien attaches to the land either way. If the buyer skips the taxes and you do not notice, your title is what is at risk. If taxes are already behind, read about selling land with back taxes first.
- Getting the land back in worse shape. Cleared timber, dumped junk, an abandoned trailer, a half-built structure, or liens from the buyer's contractors.
- Your money arrives slowly. If you need the proceeds now, a land contract does not provide them.
- Federal lending rules. The Dodd-Frank loan originator rules in Regulation Z cover consumer credit secured by a dwelling, which the regulation defines as a residential structure. A sale of bare vacant land generally falls outside them. If the parcel has a home or mobile home on it, they can apply. The seller-financing exclusions are narrow: one property in a 12-month period for an individual, estate or trust, or three properties for any seller, with conditions such as a fixed rate (or one that cannot adjust for at least five years), no negative amortization, and for the three-property version a fully amortizing loan and a good-faith finding that the buyer can repay. The SAFE Act separately requires a state license for people who originate residential mortgage loans habitually and in a commercial context. State rules are often stricter. If you plan to finance more than an occasional sale, talk to an attorney first.
Risks to the buyer
A fair contract accounts for these, and a careful buyer will raise them:
- The buyer can lose the land and every payment made after a default, depending on the state.
- The seller still holds legal title, so the seller's own liens, judgments, mortgage or death can cloud it.
- There is often no title search or title insurance unless the buyer insists on one.
- A balloon the buyer cannot refinance ends the deal.
How a land contract is taxed
In general terms, the IRS treats a sale as an installment sale when you receive at least one payment after the tax year of the sale. You report it on Form 6252 in the year of the sale and each year you receive payments.
Each payment has three parts: interest, which is ordinary income; gain, which is taxed as you receive it; and a return of your basis, which is not taxed. You can elect out and report all the gain in the year of sale. The installment method is not available for a sale at a loss or for land held for sale to customers by a dealer.
Charge a real interest rate. If the contract states too little interest, the IRS can recharacterize part of the principal as interest. There are also specific rules for what you report if you repossess the land. Our guide to capital gains tax on a land sale covers the gain side, and a CPA should handle your actual return.
When a cash sale is the better choice
A land contract can make sense if you do not need the money now, you want monthly income with interest, and you are prepared to take the land back if it goes wrong.
A cash sale is usually better when:
- You need the proceeds for something specific.
- You live out of state and cannot keep an eye on the parcel or the tax bill.
- The land was inherited and several heirs need a clean split.
- You do not want to service a loan or chase late payments for ten years.
- Taking the land back and reselling it would be a real burden.
The trade is price for certainty. A financed sale often brings a higher price on paper, and a cash sale brings less, all at once, with nothing left to manage. We compare the options in cash offer vs. listing your land. If you want to try seller financing on your own, start with how to sell land by owner.
To see the monthly payment, the balloon balance and the full payoff schedule for your own numbers, use our land contract calculator.
Michigan has its own forfeiture, recording and transfer-tax rules for sellers; they are laid out statute by statute in our Michigan land contract guide.
Minnesota calls it a contract for deed and regulates the cancellation step by statute; see contract for deed in Minnesota.
Sellers report the gain as payments arrive; the land contract tax guide shows the formula.
Wisconsin charges its real estate transfer fee when the land contract is recorded, not when the deed is delivered; see the Wisconsin land contract guide.
Ohio's well-known land installment statute only reaches property with a dwelling on it; see the Ohio land contract guide.
The bottom line
A land contract is seller financing. You keep legal title, the buyer holds equitable title and makes payments, and the deed changes hands when the balance is paid. The payment is simple math. Default, taxes, recording and state law are the parts that need an attorney.
It works for sellers who want income and can live with the risk. If you would rather be done, a cash sale closes once and stays closed. You can get a cash offer from us within 24 hours, with no fees or commissions, and we pay the closing costs. Compare it against the financed price and decide which you would rather have.
This guide is general information, not legal advice. Deed, tax and recording rules change and differ by county, so confirm the details with your county recorder or an attorney before you sign or file anything.