Land Contracts vs. Mortgages: What Independent Agents Should Know

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  • Owning a home is still considered the American Dream for many. 

    According to the National Association of Realtors, 84 percent of Americans view home ownership as a good investment and think it’s a smart long-term financial decision. That said, mortgage approval is a major concern, and many home buyers seek alternative means of financing that go beyond a traditional mortgage. 

    One route that’s becoming increasingly popular of late is a land contract. Independent agents can help customers who are interested in this option navigate the process, while at the same time growing their business. 


    What’s a Land Contract?

    A land contract is an alternative method of financing for home buyers.

    Attorney Kelsey Cooke defines it this way: “A land contract is a written legal contract, or agreement, used to purchase real estate, such as vacant land, a house, an apartment building, a commercial building, or other real property. It is similar to a mortgage, but rather than borrowing money from a lender or bank to buy real estate, the buyer makes payments to the real estate owner, or seller, until the purchase price is paid in full.” 

    In other words, a land contract is a form of financing where a buyer pays for property by making payment installments to the seller over time rather than in one lump sum with a mortgage. 

    Reporter Dana Sparks at SF Gate Homes says land contracts can help buyers purchase property, even if they can’t secure traditional financing from banks due to credit issues. Land contracts are beneficial to sellers because the number of qualified buyers increases, which may be reflected in the sale price.

    As with a mortgage, if a buyer fails to make payments due under the land contract, they forfeit the property, and the seller keeps it along with all money received. Title to the property is often only transferred when payment is made in full, so there’s minimal risk at the seller’s end, often making it a win-win for both parties and an efficient way to buy and sell property.


    How Independent Agents Fit Into the Picture 

    Educating customers is integral to the success of an independent agent. After all, one of the main ways agents bring value is in their ability to serve as a trusted advisor. 

    The team at Reichley Insurance Agency, an Ohio-based insurance provider, points out that strong relationships are built through education rather than just selling. The better you are at simplifying complex concepts and explaining the best insurance options based on a customer’s unique needs, the quicker your business will grow. 

    Making education a core part of your mission should naturally raise your overall customer satisfaction level, writes Carrie Weitzel, head of customer success at LearnUpon, a learning management system. You can make yourself valuable by acting as a resource for anyone interested in using a land contract to purchase property and needs to insure it. This brings us to our next point.

    Land contracts

    Anticipate Customer Challenges and Questions 

    The best way to go about this is to identify common challenges and questions homeowners insurance customers have and address them. 

    Specific areas to tackle include knowing which forms and documents are involved with the process, what goes into drafting a land contract, how much is due as an initial down payment and how land contracts are enforced, writes Debbie Conrad, senior attorney and director of legal affairs for the Wisconsin Realtors Association. These are good starting points, and you’ll want to be able to provide that information to your homeowners insurance customers and leads. 

    Owen Pearson at PocketSense says there’s often confusion about who’s responsible for making repairs to a property — the buyer or the seller. He explains that repairs usually fall into the hands of the buyer, and it’s up to them to handle maintenance.

    Buyers will want to know what can potentially go wrong with a land contract, says the team at Standard Legal, a legal forms software provider, such as when the seller has an existing mortgage on the property. Laws regarding land contracts vary by state, so you’ll need to research what’s applicable in your area. 

    However, you can also learn a lot and gain an overarching perspective by checking out key resources. For instance, the Wilmoth Group, a property management company, has a detailed guide to land contracts that can be very helpful. 


    Thoroughly Review Homeowners Insurance Policies

    The structure of a land contract will dictate the type of insurance a person should carry. So it’s your job as an independent agent to inform a customer what’s right for them. 

    “If the seller has already transferred the deed to you, then you will want to carry homeowner’s insurance,” notes real estate writer Candace Webb. “If, however, your land contract is structured as such that the deed does not transfer until you have paid the property off in full, you will need to carry renter’s insurance, which of course will only cover your contents and personal property, not the structure.”

    Until title to the property is legally transferred to the buyer, the seller should carry comprehensive homeowners insurance.

    This is something your customers need to be aware of right from the start, and you’ll want to make sure they meet the criteria when discussing homeowners policies. Besides that, you’ll want to go over their different options to help them find the ideal premium, while ensuring they have adequate coverage.

    Land contracts

    How to Effectively Present the Information 

    There’s a lot that goes into educating homeowners insurance customers on land contracts. It’s important that you break down the information clearly and succinctly in a way that your customers can make a well-informed decision when considering this method for buying a home. 

    A meeting or conversation over the phone tends to work well with many customers. This should allow you to explain the ins and outs and answer any pressing questions they may have. 

    But because you’re throwing so much information at them, it’s also a good idea to develop some additional resources they can use for reference. Nikos Andriotis at the online learning platform TalentLMS says it’s well worth your time to publish information on your website because land contracts can be a tricky topic from an insurance perspective. Animated explainer video company Wyzowl points out that video is particularly effective because you can condense a lot of information into a short video and cover quite a bit of content.


    Look for Referral Opportunities 

    You’re not a lawyer, and there’s a good chance that at some point there’ll be a question you can’t answer with full confidence. Your customer will need to enlist the help of a knowledgeable attorney, which is when you can do is point them to a local real estate lawyer. 

    “Real estate law encompasses the purchase and sale of real property, meaning land and any structure on it,” says personal finance writer Troy Segal. “It also covers legal issues related to anything that is attached to the property or structures, such as appliances and fixtures.”

    This can be an excellent opportunity to use those connections you’ve formed with real estate attorneys in your area and send clients their way.


    Help Your Customers Navigate the Land Contract Process

    A traditional mortgage works well for many people. For others, it’s simply not a realistic option, especially if they’ve had credit problems in the past. However, a land contract can be viable in many cases and provide them with a means of financing to purchase real estate.

    While most people understand the basics of how a land contract works, figuring out the smaller details can be complicated. This gives independent agents a chance to serve as a trusted advisor, educating customers and pointing them to the right type of homeowners insurance. That way customers can navigate the process more easily, and you can grow your insurance business.

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