The land contract, purchase contract, or contract for deed is recommended as a method of sale when the buyer does not have a sufficient down payment. It is an agreement whereby one party agrees to convey land to another party for a certain price, with the seller retaining legal title and the deed until some specified future date (for example, until all payments are made). Although legal title stays with the seller during the contract, equitable title passes immediately to the buyer. The land contract is becoming popular in several states among unrelated parties.
There are several variations in methods of payment under the land contract. Some are as follows:
• Fixed money price and fixed annual payments.
• Payment based on fixed amount of commodities each year. For example, the contract could specify so many bush- els of wheat each year. The value of the payment would then be determined by the price of wheat for that year.
• Fixed purchase price with yearly payment based on percentage of gross receipts. This method is sometimes used on dairy farms.
• Variable purchase price with variable payments. The payments could consist of a certain percentage of the gross income during the parents’ lifetime.
• Combinations and variations of the above may be worked out.
Advantages
• The purchase contract facilitates the purchase of a farm by a young buyer with limited funds. It is one of the few ways this can be done.
• The repayment schedule encourages a young farmer to build up equity during the early years.
• Some sellers like the purchase contract because of income tax savings due to use of the installment plan. Install- ment payments allow the gain from the sale to be spread over several years.
• An element of control is left in the hands of the seller.
• Ejection of a defaulting buyer under a contract for deed may be easier than a mortgage foreclosure. However, courts often tend to require similar procedures in each case.
Disadvantages
• The buyer has less secure title to the property, since it is an equitable title, but not the legal title.
• It may be more difficult for the buyer to sell his equity if, for health reasons, he wants to quit farming.
• If the down payment is small, the seller takes more credit risk in the early years of the contract than is taken by regular lending agencies that require a larger buyer equity.