What is a land contract?
A land contract is seller financing where the deed stays with the seller until the buyer makes the final payment. The buyer moves in or takes over the property right away, pays the seller over time and gets the deed at the end. Ohio’s statute, for example, defines a land installment contract as one where the vendor keeps title as security while the buyer pays the price in installments.
In a typical seller-financed sale, the buyer gets the deed at closing and signs a note secured by a mortgage or deed of trust. In a land contract, the contract itself serves as both the sale agreement and the financing. That one difference drives most of the pros, cons and state rules below.
Equitable title vs legal title
In a land contract, the seller holds legal title and the buyer holds equitable title. Legal title is the deed on record. Equitable title is the buyer’s right to use the property, keep any increase in value and receive the deed once the contract is paid.
Because the buyer holds equitable title, the buyer usually pays the property taxes, insurance and repairs, and bears the risk of loss. The seller’s legal title works like collateral. If the buyer defaults, the seller is already on title, which is why land contracts were once seen as easier to enforce than mortgages. Many states have since narrowed that advantage.
How land contract payments work
Land contract payments look a lot like mortgage payments: a down payment, then monthly principal and interest to the seller, often with a balloon at the end. The steps usually run like this.
- The parties sign the contract with the price, down payment, rate, payment schedule, balloon date and who pays taxes and insurance.
- The buyer pays the down payment and takes possession; the seller keeps the deed.
- The seller, or better a title company, records the contract or a memorandum of it in the county records.
- The buyer pays monthly, ideally through a servicer that tracks the balance and sends yearly statements.
- When the balance is paid, often by a refinance at the balloon, the seller delivers the deed and the contract is released.
Pros and cons for the seller and the buyer
A land contract trades a quicker, cheaper closing for more risk on both sides. The seller gets income and keeps title as security, and the buyer gets a property without a bank loan. The table lays out the main tradeoffs.
| Side | Pros | Cons |
|---|---|---|
| Seller | Monthly income and interest; title stays with seller; gain spread as an installment sale; wider pool of buyers | Buyer may default or neglect the property; state forfeiture limits can force a foreclosure; an existing mortgage’s due-on-sale clause can be triggered |
| Buyer | No bank loan needed; flexible terms; faster closing; possession and upside right away | No deed until paid off; seller’s liens or judgments can cloud title; can lose payments through forfeiture in some states; balloon may force a refinance |
Forfeiture vs foreclosure: how states treat a buyer’s default
When a land contract buyer defaults, the seller’s remedy depends on state law. Some states allow forfeiture or cancellation after notice, while others require a foreclosure once the buyer has built up enough equity. Forfeiture ends the contract, and the seller usually keeps the payments. Foreclosure sells the buyer’s interest, and any surplus goes to the buyer. Here’s how four states handle it, taken from their statutes.
- Texas (Property Code chapter 5, subchapter D): for executory contracts on property used as the buyer’s residence, the seller must give notice and a 30-day cure period before rescission or forfeiture. Once the buyer has paid 40% or more of the amount due or the equivalent of 48 monthly payments, or the contract is recorded, the seller must use a trustee’s sale with at least 60 days to cure.
- Ohio (Revised Code chapter 5313): forfeiture can start only 30 days after a default, and the notice gives the buyer 10 days to perform. If the buyer has paid for five years or more, or paid 20% or more of the price, the seller must use judicial foreclosure.
- Michigan (MCL 600.5744): a seller can recover possession through a court case after forfeiture, but the buyer keeps a redemption period of 90 days after judgment if less than 50% of the price is paid, or six months if 50% or more is paid.
- Minnesota (Statutes 559.21): for contracts signed on or after August 1, 1985, cancellation generally requires a statutory notice and 60 days to cure, and the statute now requires 90 days’ notice for contracts for deed signed by an investor seller. The buyer can ask a court to suspend the cancellation.
Recording the land contract
Recording the land contract in the county where the property sits protects the buyer against later liens and sales by the seller, and some states make recording the seller’s job. Texas requires the seller to record a residential executory contract within 30 days of signing. Ohio requires the vendor to record the contract within 20 days after both parties sign.
Recording also changes the seller’s options in some states. In Texas, once the contract is recorded, forfeiture is off the table and the seller must use a trustee’s sale instead. A title company can record the contract or a memorandum, check for liens first and handle the deed at payoff.
How a land contract is taxed
For federal tax, a land contract sale is usually treated as a sale when the contract is signed and the buyer takes over, not when the deed is delivered, and the seller reports it as an installment sale. IRS Publication 537 lists a land contract as one form of installment obligation. So the seller reports gain on Form 6252 as principal comes in, using the gross profit percentage, and reports interest as ordinary income.
The buyer is generally treated as the owner for tax purposes once the benefits and burdens of ownership pass, even without the deed. The Tax Court weighs factors such as possession, who pays taxes and insurance, who bears the risk of loss and who gets the profit from the property, as in Grodt & McKay Realty v. Commissioner, 77 T.C. 1221 (1981). IRS Publication 946 looks at similar incidents of ownership to decide who can claim depreciation.
For a home buyer, IRS Publication 936 lists a land contract as a secured debt, so the interest can qualify as deductible home mortgage interest. For an investor buying a rental, interest and depreciation are rental deductions. The seller stops depreciating the property once the sale happens for tax purposes and faces depreciation recapture rules like any other seller.
Worked example: a 6-unit building sold on a land contract
Say an owner sells a 6-unit building for $900,000 on a land contract. The buyer puts $90,000 down and the seller finances $810,000 at 7.5%, amortized over 25 years with a balloon at year five. The monthly payment is $5,985.83, or $71,830 a year. In year one the buyer pays $60,361 of interest and $11,469 of principal.
The seller’s adjusted basis is $400,000 and selling costs are $30,000, so gross profit is $470,000 and the gross profit percentage is 52.22%. If the contract closes in January, the seller reports $52,989 of gain in year one: 52.22% of the $90,000 down payment plus the $11,469 of principal. At year five the balance is $743,034, and paying it off produces $388,029 of gain.
This is where default rules matter. By year five the buyer has paid $449,150 in cash, the $90,000 down payment plus $359,150 in monthly payments, yet has paid down only 17.4% of the price in principal. In a state that allows forfeiture, one default could cost the buyer all of it, which is why courts and legislatures protect land contract buyers.
| Item | Amount |
|---|---|
| Price / down payment | $900,000 / $90,000 |
| Financed by seller | $810,000 at 7.5%, 25-year amortization |
| Monthly payment | $5,985.83 |
| Year-one interest / principal | $60,361 / $11,469 |
| Gross profit percentage | 52.22% ($470,000 / $900,000) |
| Gain reported in year one | $52,989 |
| Balloon at year five | $743,034, with $388,029 of gain |
Land contract vs mortgage vs seller financing
The core difference is who holds the deed during the loan and what the seller has to do if the buyer stops paying. Here’s how a land contract compares with a bank mortgage and with seller financing through a note and deed of trust.
| Feature | Land contract | Bank mortgage | Seller financing (note and deed of trust) |
|---|---|---|---|
| Deed at closing | No, seller keeps legal title | Yes, to buyer | Yes, to buyer |
| Who lends | Seller | Bank or lender | Seller |
| Security | Seller’s retained title | Mortgage or deed of trust | Mortgage or deed of trust |
| Default remedy | Forfeiture or foreclosure, by state law | Foreclosure | Foreclosure |
| Title insurance | Harder to insure buyer’s interest | Standard | Standard owner’s and lender’s policies |
| Tax treatment for seller | Installment sale | Cash sale | Installment sale |
Land contracts in apartment building sales
Land contracts tend to show up in smaller apartment building sales, often between a retiring owner and a local buyer who can’t get bank financing. On a 5+ unit building, the buyer is an investor and the deal is business-purpose credit, so the consumer protections written for homes usually don’t apply. State forfeiture and foreclosure statutes may still.
For 5+ units, a recorded note and deed of trust or mortgage is usually the cleaner structure. The buyer gets the deed, so the buyer can sign leases, get insurance and permits, and later refinance or sell without the seller’s signature. The seller gets a clear lien, standard lender’s title insurance and a well-known foreclosure process.
Either way, the economics are the same: a down payment, a rate, an amortization and a balloon. Underwrite the building’s NOI, cap rate and DSCR on the new payment, and model the installment sale with your CPA. Our seller financing guide and installment sale guide go deeper, and a wraparound mortgage is another option when an existing loan stays in place.
Selling your apartment building on terms
Skyline Capital Investments buys apartment buildings with five or more units nationwide, and we can offer seller-carry terms, usually as a recorded note and deed of trust or mortgage. The price, down payment, rate, payments and balloon all go in the letter of intent, so you can compare it side by side with an all-cash offer.
Send the address and unit count through the form on this page or call (469) 660-2977. We typically respond within 48 hours.
