Land Contract Basic Terms

• In a land contract, the vendee makes all payments directly to the vendor, from the down payment to the monthly payment. Although the vendor may hire a mortgage servicing company to issue statements and establish escrow, the servicer does not hold the deed; the vendor does. After the contract ends -- terms are usually brief (between 5 and 10 years) -- the vendee is expected to refinance into a regular mortgage or pay the remaining balance in cash. When the vendor is paid in full for the note, the deed is transferred to the vendee.
  
  

Land Contract Pros and Cons

• Bypassing the bank allows a vendee to qualify for a mortgage before the bank would permit it. Vendees may take advantage of the tax benefits of homeownership, such as deducting mortgage interest. They also get the benefit of any appreciation in the value of the home, which will make it easier to refinance at term-end.
  
  Vendors, especially those that don't have an outstanding mortgage obligation, will earn a steady income stream. They're also relieved from the responsibilities of homeownership. If the home sale resulted in a capital gain, they can spread the gain out over the course of the term, resulting in a lowered tax burden.
  
  Both parties suffer if the vendee becomes delinquent in payments. Although vendors may foreclose, it's costly and slow. If the title is clouded with liens or other ownership issues, that will make refinancing difficult. As a result, thorough due diligence should be completed by both parties.
  
  

Trust Deed or Deed of Trust

• A trust deed uses the property as collateral, with the deed used as evidence of ownership. During the deal term, the trustor -- the borrower -- has equitable title to and possession of the property that's secured by the trust deed. When the loan is satisfied, either by refinancing or cash, the trust company transfers the deed of ownership to the trustor. Should the trustor default on the loan, the trustee (the deed-holder) has the power to sell the property in a foreclosure proceeding. The proceeds are used to pay the seller, called the beneficiary, with any leftover funds returned to the trustor.
  
  

Trust Deed Pros and Cons

• The biggest advantage to using a trust deed is that the trustee is an impartial third party who is retained to guard the best interest of both parties. For example, in a trust deed the beneficiary would not be permitted to secure a new loan against the property. This protects the trustor in the event of default, and protects the title, as well.
  
  Beneficiaries and trustors enjoy the same tax advantages, as well as ownership (or are relieved from the responsibilities of ownership).
  
  If the trustor defaults, and the trustee orders a foreclosure by power of sale, the beneficiary has the right to repurchase the property. This type of foreclosure, unlike a judicial foreclosure, is not reviewed in a court of law. As a result, there is a greater chance of litigation resulting from these actions.
  
  Finally, not every state uses trust deeds, and you'll need to pay an attorney and a title company. Check with your legal counsel to determine the uses of trust deeds in your state.