Considerations For Buying or Selling Real Estate with a Land Contract
Many potential homebuyers are still recovering from recent economic downturns. They may have income but a low credit score, or have gone through a bankruptcy, a short sale, or incurred debt due to medical bills or other financial issues.
Whatever the cause, more Michigan homebuyers are considering purchasing property using a land contract. This type of seller financing can be used to buy a home, a vacant lot, commercial property, farms, and other types of property. Because a land contract can facilitate a property sale outside of traditional financing options, using this type of contract to purchase real estate is becoming increasingly popular.
If you are considering buying or selling property using a land contract, there are important rules and regulations you must follow. Experienced Michigan real estate attorney Bill Ager can help you avoid the pitfalls associated with these contracts and structure the purchase in a way that will protect your legal rights.
What Is a Land Contract?
A land contract is a seller-financed alternative to a traditional mortgage.The agreement states that the buyer is purchasing the property but will not receive legal title until the debt has been satisfied. It is a form of seller financing that can be used in real estate transactions when the buyer cannot secure traditional means of financing. If the buyer does not fulfill his financial obligations, Typiclly the seller regains possession of the property and keeps whatever money the buyer has already paid.
Land contracts are legal in Michigan and are enforced like any other contract. To be enforceable, the contract must be in writing. If either party to the contract fails to meet his obligations, the other party can sue for breach of contract.
How Are Land Contracts Different from Other Financing Options?
They are often used when the buyer is unable to obtain a traditional mortgage. While a land contract and a traditional mortgage are both ways of financing a real estate transaction, there are some basic differences between the two.
A land contract typically grants the purchaser immediate possession and control of the property. Under Michigan law, someone who purchases property through a land contract will immediately obtain equitable title to the land. Legal title remains with the seller. However, there is little difference between legal title and equitable title in practice.
Because a land contract is between the buyer and the seller, there are no standardized forms. This means that every land contract can be a little bit different. It also means you need to be very careful when negotiating a land contract and ensure that the terms of the agreement do not put you at a disadvantage. These contracts often offer fewer protections, especially for buyers, than mortgages.
Considerations When Buying or Selling Real Estate with a Land Contract
When using a land contract, there are several considerations for both the buyer and seller. Because the buyer is seeking financing outside of a traditional bank, the seller may set their own requirements for the buyer’s creditworthiness, the amount of the down payment, interest rate or other items that a bank might typically dictate.
If you are considering using a land contract to buy real estate, ask yourself:
- What can you afford as a down payment?
- How much can you afford in monthly payments and interest on the unpaid principal?
- If you include a balloon payment, how will you pay for it?
- What legal remedies does the seller have if you default?
- If the seller has an underlying mortgage on the property, what legal issues can arise between the seller and the seller’s lender?
If you are planning to sell real estate using a land contract, consider:
- How much of a financial return do you need, and what terms will generate that financial return?
- How will you assess the buyer’s creditworthiness and their ability to follow through on the purchase?
- Are you prepared to take on the role of a landlord?
- How will you enforce the terms of the contract?
- If you have a mortgage, will selling under a land contract impact your agreement with the lender?
- Have you provided the buyer with a Seller’s Disclosure Statement?
Items to Include in a Land Contract
For a land contract to be enforceable, it must be in writing and must satisfy general contract principles, including offer, acceptance, consideration, competency, and a definite statement of terms.
A Michigan land contract should also:
- Address all payment terms
- Give the buyer possession of the property during the terms of the land contract
- Indicate that the buyer has title insurance on the property and accepts the terms of the policy
- Address payment of property taxes
- Require that the seller deliver a warranty deed to the buyer upon performance of the contract
- Require that the warranty deed be held in escrow until payoff of the land contract.
- Require that the seller pay transfer taxes when delivering the deed to the buyer
- Address liability and casualty insurance
- Specify whether the buyer can transfer his interest in the land without prior consent of the seller
- Require that the buyer maintain the property in good condition
- Specify whether the buyer can make substantial changes to the property without prior consent of the seller
- Address whether the seller can place a mortgage on the property
- Identify the legal remedies for both parties in the event of a default
What Happens If Someone Defaults on a Land Contract?
If problems arise when someone is making payments on a land contract, it is often best to try to talk through problems as they arise. But sometimes a buyer or seller must resort to the courts to address a problem with a land contract.
If either side has defaulted on the terms of the land contract, start by looking at the document to see what remedies are available. If the buyer has defaulted on the terms, the seller can bring a court action to regain possession of the property through forfeiture or foreclosure. If the seller has defaulted on the terms of a land contract, the buyer can bring a court action to enforce the terms of the land contract, to quiet title to the property, to rescind the purchase and/or seek money damages.
Contact Ager Law Offices for Help with Your Real Estate Transaction
A land contract is an attractive alternative to a traditional mortgage that can facilitate the purchase of real estate. However, using this comes with unique risks and legal considerations. If you are considering purchasing real estate using a land contract, you should consult with experienced Michigan real estate attorney Bill Ager.
Bill has extensive experience handling real estate transactions in Washtenaw County and is committed to offering legal services for a reasonable flat fee. To speak with Bill about your real estate transaction, call (734) 649-0784, email firstname.lastname@example.org, or use our online contact form.