Land Contract vs Private Mortgage from the buyer's side

[Karolina Powell]

I have an acquaintance who is looking to sell their portfolio and willing to finance it with a low downpayment. The deal pencils even if I went to get a regular DSCR loan with 20% down. However I am looking further into this seller financing option. The seller wants to do a land contract at 8% with a five year balloon. If I'm understanding correctly, a land contract would allow him to retain record title and thus, if he was to get into trouble and rack up a lien/judgment, then the property would be encumbered when I went to refinance and purchase. Is that correct? What other downsides are there for me for doing a land contract versus just purchasing it and him holding a mortgage on the property?

I appreciate any insight!

[Drew Sygit]

Quote from @Karolina Powell:

I have an acquaintance who is looking to sell their portfolio and willing to finance it with a low downpayment. The deal pencils even if I went to get a regular DSCR loan with 20% down. However I am looking further into this seller financing option. The seller wants to do a land contract at 8% with a five year balloon. If I'm understanding correctly, a land contract would allow him to retain record title and thus, if he was to get into trouble and rack up a lien/judgment, then the property would be encumbered when I went to refinance and purchase. Is that correct? What other downsides are there for me for doing a land contract versus just purchasing it and him holding a mortgage on the property?

I appreciate any insight!

 I've bought properties both ways in Michigan.

The only caveat on a land contract is to make sure there's a deed held in escrow by a realiable entity. I've used title companies.

The reasons to hold an exucted deed in escrow:
1) You do NOT want to have to chase down the land contract holder, who may have moved and may be difficult to find
2) The land contract holder finances may have changed and they may try to charge you for signing the deed or worse
3) Land contract holder may have died and you will be subject to their estate/heirs

For a seller, at least in Michigan, a land contract allows them other options than foreclosure:

Land Contract Forfeiture: A Faster, Streamlined Option

In Michigan, forfeiture allows a seller to reclaim property more quickly when a buyer breaches a land contract. If specified in the contract, the seller must first issue a 15-day forfeiture notice (you can use form DC101 provided by the State Court Administrator’s Office), giving the buyer a chance to pay past-due amounts. If the buyer fails to cure the default, the seller may file a complaint for possession in district court.

Once the court schedules a hearing (typically within 30 days), it may issue a judgment of possession. Following a successful judgment, the buyer is offered a redemption period: 90 days if less than 50% of the purchase price is paid, or 180 days otherwise. If the buyer fails to redeem, the seller obtains full possession; however, forfeiture bars certain monetary relief that you must discuss with counsel to understand the remedy.

Foreclosure: When Equity Is at Stake

Foreclosure is the more comprehensive route when a buyer has significant equity or the seller needs to recover a deficiency. In foreclosure, the seller can accelerate the remaining balance and pursue a full judgment in circuit court. This process often concludes with a sheriff’s sale, where property proceeds may repay outstanding debt, and a deficiency judgment may be sought if the sale price falls short.

Foreclosure takes longer and costs more than forfeiture, but provides broader legal remedies—making it a better fit for recovering full value or dealing with complex title and equity issues.