Q. I make approximately $20,000 a year and want to buy three acres of land so that eventually I can build a home. I have heard about land sales contracts, and would like to get more information about this concept. I can afford to pay $350 a month on raw land, and because the value of land is going up each year I want to invest in land now. What do you advise?
A. First, not every acre of raw land will necessarily increase in value. Before you enter into such a purchase, make sure that you have done a feasibility study to determine whether the land is fit for your purposes. Are there zoning pressures within the local county that might restrict the building of property? Is the land suitable for building? Is the soil solid enough for construction purposes? Are there any underwater springs in the area? Will you be able to tap into the local water and sewer system, or will you need a septic tank?
Before you sign a contract to purchase this land, make sure that you have done your homework. In fact, it is recommended that you sign a contract to purchase the property, and have that contract contain a contingency so that you can perform a feasibility study before finally committing yourself to the actual purchase. You should be able to have 90 to 120 days free option to do this study, and have the right to have your deposit returned in full immediately if you determine, for any reason, that the land is unsuitable for your purposes.
Land sales contracts are not common in the Washington area, but are legal and certainly can provide a mechanism for accomplishing your goals.
Oversimplified, the land sales contract -- also referred to as a contract for deed or an installment contract -- is a legal transaction in which the buyer makes a down payment, and the balance of the purchase price is made in monthly or quarterly installments. Title to the property does not turn over to the buyer until a set time, generally agreed upon by the parties.
In the absence of a specific statute (such as exists in Maryland) the parties are free to enter into any contractual arrangement they want, as long as it does not violate public policy. Generally speaking, the seller is obligated to convey title in accordance with the terms of the contract. This could be when the buyer either pays the entire purchase price in full, or reaches a certain point in the transaction.
Needless to say, the land installment contract raises many legal problems -- although they are not insurmountable.
From the seller's point of view, although legal title does not pass, equitable title does. This means that the purchaser has the absolute right to use the property as he or she sees fit, can take all of the tax benefits associated with real estate, and for Internal Revenue Service purposes, the signing of an installment sales contract is a sale. Thus, the seller should be aware of any tax treatment that would be associated with that sale.
Additionally, the seller wants to make sure that taxes will be paid when they become due. If there is a mortgage on the property, the seller wants to be satisfied that the mortgage payments are made when due, so that no foreclosure will result. After all, until the deed is transferred to the buyer, the seller still holds legal title.
The buyer has problems also. What guarantee does the buyer have that the seller will not sell the property fraudulently to other purchasers? It is absolutely imperative that the land contract sale (or a memorandum reflecting that contract) be recorded in the jurisdiction where the land is located. Many state laws, such as Maryland's, require that these contracts be recorded, but there is no universal law requiring such recordation.
What arrangements will be made for the actual advance of the deed, when the terms of the contract have been met? If transfer of title is not to take place for a number of years, it is conceivable that the seller could die or otherwise be incapacitated. It is advisable to require the seller to put the deed in escrow with a public institution or an attorney so that the escrow agent will have the absolute authority to record the deed in favor of the buyer when the conditions of the contract have been met.
Additionally, the land sales contract potentially affects existing mortgages. Most mortgages (deeds of trust) contain "due on sale" clauses. This means that if the property is sold, the existing mortgage lender has the right to accelerate the remaining balance of the mortgage and call the whole thing due. While the courts around the country are divided on the question of whether a land sales contract does in fact trigger the due-on-sale clause, this is something that should be of significant concern to you.
If you wish to pursue such a contract, make sure that you discuss these issues fully with your tax and legal advisers. A carefully drawn land installment contract must be prepared, touching all of the points raised above.
On balance, if the land meets your needs, I certainly recommend that you pursue the land installment sales contract route. However, enter into this transaction carefully, with your eyes wide open, so that your legal rights will be fully protected.