Land Sale Contract Vs. Trust Deed

Home purchasers have several financing options.

Home purchasers have several financing options.

Buying a house is usually the largest single purchase a person will make. It is rare that anyone can pay for a house in full at closing. Instead, most people finance the purchase of a house. A home buyer can seek to finance the purchase through a bank loan secured by a deed of trust. Alternatively, a buyer may be able to enter into a land sale contract with the owner of the property.

Bank Financing Secured by a Deed of Trust

The typical financing option chosen by home purchasers is a traditional home loan. The borrower gives the lender a promissory note, a contract through which bank agrees to loan the borrower money in exchange for the borrower's promise to repay the loan on a set schedule with interest as outlined in the note. In addition to the promissory note, the bank may require a deed of trust, which involves three parties: the borrower, the lender and a trustee. In exchange for giving the loan, the lender requires the borrower to transfer interest in the real estate to a third party -- the trustee -- who holds the deed in trust. Most states consider the transfer of property by a deed of trust to be an transfer of legal title to the property, while a few consider a deed of trust a lien on the property. The borrower remains in possession of the property and holds equitable title to the property, but if the borrower defaults on the loan, the trustee can take full control of the property. A deed of trust usually contains a power-of-sale clause, which entitles the trustee to sell the property at a trustee's sale in case of a default.

Example of a Deed of Trust Transaction and Default

Henry has found a nice three-bedroom, two-bath home in his neighborhood of choice. He has been approved for conventional bank financing. At closing, Henry signs a promissory note and the deed of trust. In the note, Henry agrees to pay off the loan over 30 years with an amortized monthly payment of $1,000. Henry executes a deed of trust that transfers legal title to XYZ Title Company as trustee. When the loan is paid in full, the trustee transfers legal title back to Henry by deed.

Land Sale Contract

A land sale contract, also known as a contract of deed, is a contract between a buyer and seller of real property. The contract usually stipulates that the buyer will purchase the property over time in installments. When all payments have been made, the seller must deliver legal title of the property to the buyer by way of a deed. A land sale contract must meet all the legal requirements of an enforceable contract and be in writing. The contract is usually recorded in the county recorder's office. The buyer obtains possession and use of the property and holds equitable title during the term of the contract, but the seller continues to hold legal title. If the buyer breaches the contract by failing to make the payments, the seller can sue for damages for breach of contract and strict foreclosure, which allows the seller to take possession of the property.

Example of a Land Sale Contract

Allison has found the home she always wanted, but she is unable to obtain traditional bank financing. The sellers are a professional couple moving overseas. The sellers agree to enter into a land sale contract with Allison since they don't really need the proceeds from the sale right away and don't want to deal with property from Europe. The contract provides that Allison will purchase the house by making 360 monthly payments of $1,000. Thirty years later, Allison makers her final purchase and the couple, long back from Europe, transfers legal title to the property by deed.


About the Author

Shawn M. Grimsley holds a bachelor's degree in political science, master's degree in public administration and a Juris Doctor. He practiced law for 10 years, focusing on general business law, securities law, real estate and civil litigation. Grimsley now serves as a teacher and writer.

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