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Land Contracts have come back in vogue as lending standards have tightened.  Land Contracts are essentially a form of Seller financing.  In a nut shell, the buyer pays the Seller in installments over a period of time until the total purchase price is paid in full. 

A buyer’s ownership interest in a Land Contract differs state by state.  So do enforcement provisions.  In Wisconsin, a land contract buyer is deemed to have “equitable title” upon signing the land contract.  This means that, for all intents and purposes, the Buyer owns the property and the seller owns a right to get paid.  This is why the seller needs to think like a bank.

If a bank won’t extend long-term financing to the buyer, why should the seller?  The short answer is: the seller needs the money, needs the sale, and needs it now.  Nevertheless, the Seller still should act like a bank by asking for credit reports, payment history, assets and liabilities, and a decent down payment.

Many (if not most) land contracts are structured so that the Buyer will make payment for a number of years and then make a balloon payment at the end.  A typical land contract might have the Buyer making 36 monthly payments of $1200 and then paying the balance in full at the end of the third year.  In this era of strict loan standards, a buyer with poor credit won’t be able to refinance in year 3 unless he has great credit and equity in the property.  That is why a seller should want to know at the front end whether the buyer has good credit (or terrible credit).  If the buyer has terrible credit, what are the odds that he will be able to refinance in the next 3 years?

And, the worse the Credit, the more the Seller should want in a down-payment.  A buyer with poor credit is also more likely to incur judgments or tax liens that can attach as liens on the property.  Once this happens, the seller’s only way to remove those liens (in Wisconsin) is to have them paid or to foreclose on the property.  Foreclosure is expensive.  Thus, a Seller that knows he is extending a land contract to a buyer with poor credit may want a large enough down-payment to cover these potential costs. 

The most important thing to understand is that only a licensed Broker or Attorney can draft a land contract on behalf of another in Wisconsin.  We strongly advise all sellers considering selling on a land contract to consult an attorney… and act like a bank.

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