Land Contract vs. Deed of Trust: 5 Critical Problems to Avoid When Seller Financing Land

By Eric Scharaga | Updated November 2024 | 14 min read

You're about to sell your land with seller financing. Your attorney hands you a "land contract" (also called a contract for deed). Seems simple enough—the buyer pays you monthly, and when it's paid off, you transfer the deed.

But you just made a $50,000 mistake.

Land contracts create five serious problems that can cost you tens of thousands of dollars, expose you to lawsuits, make your note unsellable, and trap you in a foreclosure nightmare.

After buying over 150 land notes and structuring hundreds of seller-financed transactions, I've seen every possible disaster that land contracts create. Today, I'm going to show you exactly why land contracts are dangerous, what the better alternatives are, and how to structure seller financing the right way.

Watch the full video explanation here, then read the complete breakdown below:

[EMBED VIDEO: https://youtu.be/Yp5MD837Hac]

What is a Land Contract?

Before we dive into the problems, let's define what we're talking about:

Land Contract (Contract for Deed):

• Seller retains legal title until fully paid off

• Buyer receives "equitable interest" (right to possess and use)

• Buyer makes payments to seller

• Deed transfers only after final payment

• Used in seller-financed transactions

Also called:

• Contract for deed

• Installment land contract

• Agreement for deed

• Bond for deed (in some states)

How it differs from a mortgage/deed of trust:

• Mortgage/Deed of Trust: Buyer owns property immediately, lender holds lien

• Land Contract: Seller owns property until paid off, buyer has possession rights

This difference creates five catastrophic problems.

Problem #1: You Still Own the Property (And All the Liability)

The Issue:

Under a land contract, YOU (the seller) remain the legal owner on title until the contract is fully paid off. Even though the buyer is using the property, your name is on the deed.

This means you're exposed to:

Lawsuits from Injuries

• Someone gets hurt on the property

• They sue the property owner

• That's YOU, even though you haven't set foot there in years

• Your assets are at risk

Example: You sold 10 acres with a land contract. Buyer builds an ATV track. Someone visits, crashes, gets paralyzed. They sue the property owner—that's you. Your homeowner's insurance won't cover it (commercial use). You're personally liable for $2 million judgment.

Code Violations and Fines

• Buyer lets property become overgrown

• County issues fines for code violations

• Fines are against the property owner

• That's YOU

Example: Buyer stops maintaining property after 2 years. Junk accumulates. County issues $500/day fines to the legal owner. You owe $45,000 in fines before you even know there's a problem.

Environmental Liability

• Buyer dumps hazardous materials

• EPA cleanup required

• Property owner is liable

• That's YOU

Example: Buyer runs illegal dumping operation. EPA discovers contamination. Cleanup costs: $300,000. Property owner (you) is responsible under CERCLA. Your defense: "I didn't know" doesn't work.

Property Tax Issues

• Buyer stops paying property taxes

• County pursues legal owner for back taxes

• That's YOU

• Your other properties could have liens placed

Bankruptcy Complications

• Buyer files bankruptcy

• Property is still in your name

• You're dragged into bankruptcy proceedings

• Legal costs pile up

Why This Matters for Your Business:

If you're selling land to move on to your next deal, you don't want to carry liability for property you no longer control. You want a clean exit.

With a mortgage or deed of trust:

• Title transfers to buyer immediately

• They own it, they're liable

• You hold a lien (security interest only)

• No personal liability exposure

Action: Use a structure that transfers title at closing, not at payoff.

Problem #2: Land Contracts Are Difficult (or Impossible) to Sell

The Issue:

One of the biggest advantages of seller financing is creating a performing note you can sell for immediate liquidity. But land contracts are far harder to sell than traditional notes.

Why note buyers avoid land contracts:

Complex Title Structure

• Title hasn't transferred yet

• Equitable interest vs. legal interest creates confusion

• Note buyers must understand state-specific land contract laws

• Most note buyers pass on complexity

Transfer Tax Issues

• Some states charge transfer tax when land contract is assigned

• This can be 1-2% of remaining balance

• Reduces net proceeds to seller

• Makes deal less attractive

Recording Requirements

• Memorandum of land contract must be recorded

• Assignment requires additional recording

• More paperwork, more cost, more time

State-Law Complications

• 50 different state laws on land contracts

• Note buyer must understand your specific state

• Reduces buyer pool dramatically

Lower Liquidity = Lower Prices

• Fewer buyers = less competition

• Less competition = lower offers

• You might get 40-50% of balance instead of 60-70%

Real Example:

Scenario A: Land Contract

• Sale price: $100,000

• Balance: $90,000

• Note buyer offer: $45,000 (50% due to land contract structure)

• You net: $45,000

Scenario B: Promissory Note + Deed of Trust

• Sale price: $100,000

• Balance: $90,000

• Note buyer offer: $63,000 (70% - standard pricing)

• You net: $63,000

Difference: $18,000 loss by using land contract

Why This Matters for Your Business:

If you ever need liquidity—and most land investors do—you want your note to be easily sellable. Land contracts limit your options and reduce your proceeds.

We buy notes regularly. Here's our preference ranking:

1. Promissory note + deed of trust (non-judicial state) → Best price

2. Promissory note + mortgage (judicial state) → Good price

3. Land contract → Discounted 10-20% below standard OR we pass entirely

Action: Structure your seller financing to maximize resale value from day one.

Problem #3: Added Risk for the Buyer

The Issue:

From the buyer's perspective, a land contract is less desirable than owning the property outright with a mortgage.

Buyer's concerns with land contracts:

No Legal Title

• Can't refinance property (no title to refinance)

• Can't get secondary financing

• Can't use as collateral for other loans

• Limited control over asset

Seller Risk

• If seller files bankruptcy, buyer could lose property

• If seller dies, estate issues complicate ownership

• If seller has judgment against them, property could be liened

• Buyer's interest is subordinate to seller's creditors

Marketability Issues

• Harder to resell before paying off contract

• Requires seller's cooperation to transfer

• Less attractive to sophisticated buyers

Improvement Restrictions

• Some contracts restrict improvements

• Buyer can't get construction financing

• Makes property less useful

Why This Matters for Your Business:

Even though you're the seller/financer, you want buyers who are:

• Financially stable

• Willing to pay premium prices

• Easy to work with

• Less likely to default

Sophisticated buyers prefer mortgages over land contracts. If you insist on land contracts, you'll attract less-qualified buyers or must discount your price.

With deed of trust/mortgage structure:

• Buyer owns property outright

• Full control over improvements

• Can refinance to pay you off early

• More attractive to quality buyers

Action: Make your offering attractive to the best buyers by using standard financing structures.

Problem #4: State Law Complications Make Foreclosure Expensive and Slow

The Issue:

If a buyer defaults, you need to either foreclose or take other legal action. Land contracts make this process FAR more complicated than standard mortgages.

State-specific land contract laws:

Some States Treat Land Contracts Like Mortgages

• Require full judicial foreclosure (6-24 months)

• Expensive legal process ($5,000-15,000)

• Buyer gets redemption rights

• No faster than a regular mortgage foreclosure

Example states: Minnesota, Iowa, South Dakota treat land contracts very favorably to buyers, requiring full foreclosure process.

Other States Allow Forfeiture

• Faster than foreclosure (3-6 months)

• But still requires notice, process, potential court action

• Buyer can challenge and drag out

Many States Have Specific Statutes

• Redemption periods

• Cure rights

• Notice requirements

• Recording requirements

You need to know YOUR state's specific laws—and they change.

Foreclosure Cost Comparison:

Non-Judicial Deed of Trust (Best Case):

• Timeline: 3-6 months

• Legal cost: $2,000-4,000

• Process: Trustee sale, clean title

• Buyer gets minimal redemption rights

Judicial Mortgage Foreclosure:

• Timeline: 6-18 months

• Legal cost: $5,000-10,000

• Process: Court supervised, sheriff's sale

• Buyer gets redemption rights

Land Contract Forfeiture/Foreclosure:

• Timeline: Varies wildly (3-24 months)

• Legal cost: $3,000-15,000 (uncertainty adds cost)

• Process: Depends entirely on state law

• High risk of buyer-delay tactics

Real Example:

Investor sold Minnesota land on land contract for $80,000. Buyer paid for 3 years, then stopped. Balance: $65,000.

Minnesota requires full foreclosure for land contracts where buyer has paid more than a small percentage. Process took 18 months and cost $12,000 in legal fees.

Net recovery: $65,000 - $12,000 = $53,000

With a deed of trust in a non-judicial state, same foreclosure would have taken 4 months and cost $3,000.

Net recovery: $65,000 - $3,000 = $62,000

Difference: $9,000 loss due to land contract structure.

Why This Matters for Your Business:

Default happens. 15-25% of seller-financed land deals experience some level of default. You need a structure that allows you to recover quickly and cheaply.

Action: Choose your state carefully. In non-judicial deed of trust states, use deed of trust. In judicial mortgage states, use mortgage. Avoid land contracts unless you have a specific state-law reason.

Problem #5: Clouded Title and Recording Issues

The Issue:

Land contracts create title complications that can haunt you for years.

How title gets clouded:

Memorandum Recording

• To protect buyer, a "memorandum of land contract" is often recorded

• This clouds title until contract is paid off

• Even after default, removing it requires legal action

Multiple Assignments

• If you sell the contract to a note buyer

• Note buyer assigns to another investor

• Each assignment must be recorded

• Creates chain of title complexity

Payoff Issues

• If buyer wants to refinance and pay off early

• Must get release from you

• Then record deed transfer

• Then record mortgage satisfaction

• Multiple steps = multiple places for errors

Resale Complications

• If buyer sells property before paying off contract

• Requires your consent and cooperation

• Buyer must find another buyer willing to take on land contract

• Or buyer must pay you off (requiring refinance or cash)

Title Insurance Problems

• Many title companies won't insure land contracts

• Or charge higher premiums

• Reduces property marketability

Real Example:

Seller used land contract to sell property in 2010. Buyer paid for 5 years, then defaulted. Seller went through forfeiture process, regained property in 2016.

Tried to resell in 2017. Title company found:

• Original memorandum still recorded

• Forfeiture documents not properly recorded

• Cloud on title

Cost to clear: $3,500 in legal fees and 6 months of delays.

With a mortgage/deed of trust:

• Default triggers standard foreclosure

• Sheriff's sale or trustee sale clears title automatically

• Title insurance covers process

• Clean title for resale

Why This Matters for Your Business:

You want clean transactions. Land contracts create layers of potential title problems that can cost you thousands and cause delays when you need to move fast.

Action: Use instruments that create clear, standard title chains that title companies understand and insure.

The Better Alternative: Promissory Note + Mortgage or Deed of Trust

Now that you understand the five problems with land contracts, let's discuss the solution:

Use a Promissory Note + Deed of Trust (or Mortgage)

How it works:

At Closing:

1. Buyer signs promissory note (the debt)

2. Buyer signs deed of trust/mortgage (the security)

3. Seller signs warranty deed (transfers title to buyer)

4. Deed of trust/mortgage is recorded (creates lien)

5. Warranty deed is recorded (buyer owns property)

Result:

• Buyer owns property immediately

• Seller holds a lien (security interest)

• Clear, standard structure

• Easily transferable

• Standard foreclosure process

Benefits Over Land Contract:

1. No Liability Exposure

• Buyer owns property

• Buyer is liable for injuries, violations, etc.

• You hold security interest only

2. Easy to Sell the Note

• Standard structure note buyers understand

• Higher offers (60-75% of balance typical)

• Fast closings on note sales

3. Attractive to Quality Buyers

• Buyer gets full title immediately

• Can refinance to pay you off early

• Can improve property

• Can use as collateral

4. Clear Foreclosure Process

• Non-judicial deed of trust: 3-6 months

• Judicial mortgage: 6-18 months

• Costs are predictable

• Process is standard

5. Clean Title

• Standard chain of title

• Easy to record, assign, release

• Title companies understand and insure

• No clouds or complications

State-Specific Implementation:

Non-Judicial Foreclosure States (Use Deed of Trust):

• Texas, Georgia, Tennessee, Mississippi, Alabama, Missouri, and many others

• Fastest, cheapest foreclosure process

• Trustee handles foreclosure (not court)

Judicial Foreclosure States (Use Mortgage):

• Florida, Illinois, New York, Pennsylvania, and others

• Requires court process

• Slower but still standard

Check your state's foreclosure laws and choose accordingly.

How to Structure Seller Financing the Right Way

Here's your step-by-step process:

Step 1: Hire a Real Estate Attorney

Don't use generic forms. Get state-specific documents prepared by an attorney familiar with:

• Your state's foreclosure laws

• Proper recording requirements

• Disclosure requirements

• SAFE Act compliance (if applicable)

Cost: $500-1,500. Worth every penny.

Step 2: Use These Documents

Required:

• Promissory Note (the debt instrument)

• Deed of Trust or Mortgage (the security instrument)

• Warranty Deed (transfers title to buyer)

Recommended:

• Loan Agreement (terms and conditions)

• Truth in Lending Disclosure (if required)

• Payment schedule

• Property condition disclosure

• Lead paint disclosure (if applicable)

Step 3: Record Everything

At closing:

1. Record the warranty deed (buyer now owns)

2. Record the deed of trust/mortgage (you have lien)

3. Keep originals in safe place

Step 4: Use a Loan Servicer

Don't collect payments yourself:

• Hire professional servicer ($15-30/month)

• They handle collections, statements, tax tracking

• Reduces your liability

• Professional documentation

Step 5: Get Title Insurance

Always get lender's title insurance:

• Protects your lien position

• Covers title defects

• Required by professional note buyers if you sell

• Costs $400-800

Step 6: Structure Terms Properly

Good terms for note resale:

• 10-20% down payment (protects equity)

• 9-12% interest rate (attractive to note buyers)

• 5-10 year term (not too long)

• Monthly amortizing payments (standard)

These terms make your note valuable and sellable.

When (If Ever) Should You Use a Land Contract?

Very rarely. But there are limited scenarios:

Possible Uses:

• State law heavily favors land contracts (rare)

• Buyer specifically requests and understands risks

• Very short term (1-2 years max)

• Small amount ($10,000 or less)

• You never intend to sell the note

Even then, the benefits are minimal compared to standard financing.

My recommendation: Just don't use land contracts. The downsides far outweigh any perceived benefits.

What If You Already Have a Land Contract?

If you're currently the seller on a land contract:

Option 1: Convert to Mortgage/Deed of Trust

Work with attorney to:

• Transfer deed to buyer

• Execute mortgage/deed of trust

• Record new documents

• Release land contract

Cost: $1,000-2,000 but worth it for protection

Option 2: Sell the Land Contract (Accept Lower Price)

Find a note buyer who handles land contracts:

• Expect 40-60% of balance (vs. 60-75% for standard notes)

• Get out from under liability

• Move on to next deal

We occasionally buy land contracts, but at significant discount due to added risk and complexity.

Option 3: Wait It Out

If buyer is performing and payoff is near (1-2 years):

• Continue servicing

• Transfer deed at payoff

• Hope nothing goes wrong

Not recommended for long-term contracts.

How This Affects Note Buyers (Like Us)

When we evaluate notes for purchase, here's our hierarchy:

Tier 1: Best Price (70-75% of balance)

• Promissory note + deed of trust (non-judicial state)

• Clean title

• Good payment history

• Standard terms

Tier 2: Good Price (65-70% of balance)

• Promissory note + mortgage (judicial state)

• Clean title

• Good payment history

• May take longer to foreclose if needed

Tier 3: Discounted Price (50-60% of balance)

• Land contract

• Must research state laws

• Higher foreclosure risk and cost

• Title complications

Tier 4: May Decline

• Land contract with issues

• Payment problems

• Title clouds

• High-foreclosure-cost states

Moral: Structure deals for Tier 1 pricing from day one.

Real-World Application: Your Checklist

When setting up seller financing:

☐ Consult Real Estate Attorney Get state-specific documents

☐ Use Promissory Note + Deed of Trust/Mortgage NOT land contract

☐ Transfer Title at Closing Buyer gets deed immediately

☐ Record Lien Properly Deed of trust/mortgage recorded

☐ Get Title Insurance Lender's policy required

☐ Use Loan Servicer Professional collection and documentation

☐ Structure for Resale Good terms = high note value

☐ Keep Clean Records Payment history, documents, communications

☐ Plan Exit Strategy How will note be paid off or sold?

The Bottom Line on Land Contracts

Land contracts are outdated, risky instruments that:

• Expose you to liability

• Make notes harder to sell

• Complicate foreclosure

• Cloud title

• Disadvantage buyers

The better alternative: Promissory note + deed of trust (or mortgage)

This structure: ✓ Transfers title immediately (no liability) ✓ Creates easily-sellable notes ✓ Uses standard foreclosure process ✓ Keeps title clean ✓ Attracts quality buyers

Every land investor doing seller financing should use promissory notes and deeds of trust/mortgages—NOT land contracts.

Key Takeaways:

• Land contracts keep you on title (liability exposure)

• Note buyers pay 10-20% less for land contracts

• Foreclosure on land contracts is state-specific and complex

• Deed of trust + promissory note is the professional standard

• Structure deals right from day one—it's hard to fix later

• When in doubt, consult a real estate attorney

Want to discuss your seller financing structure or sell an existing note?

Watch the full video above, then contact us:

Call/Text: 302-526-0200Email: eric@damencapital.com