Law Office Report - Winter 2009
Rise in Popularity of Land Contracts
Attorney Robert F. KonkolThe early 1980’s saw a rapid rise in the use of land contracts because, among other reasons, mortgage interest rates were typically in the 15% to 20% range. Nowadays, as our economy slows and credit availability tightens, a similar rise in the use of land contracts seems to be occurring. Therefore, a brief review of land contracts might be of benefit to persons interested in buying and selling land.
A land contract is a document by which the seller conveys a possessory interest in land to the buyer. The buyer makes payments over time to the seller until the purchase price is paid in full. The seller then conveys all of his or her remaining interest in the land to the buyer by a warranty deed.
In essence, the seller acts as the lender in the land contract. Consequently, the seller should obtain a credit report to assess the credit worthiness of the buyer before entering into the land contract. Further, the seller should always obtain a sufficient down payment from the buyer. As a general rule of thumb, a minimum of 20% of the purchase price should be required. The down payment should be large enough to cover costs, expenses and loss of payments incurred by the seller if the buyer stops making payments. In that case, the seller may have to commence a foreclosure action to recover the property. Thus, the larger a down payment, the more protection exists for the seller.
The land contract typically makes the buyer responsible for payment of insurance and real estate taxes on the property. The seller may require an escrow from the buyer to make sure there is sufficient money to pay insurance and taxes. The seller will also want to make sure he or she is listed as an additional insured on the insurance policy and will be notified in case of an insurance cancellation.
From the buyer’s perspective, the buyer will want the seller to provide title insurance to verify that the seller owns the property free and clear of liens. If the seller has a mortgage on the property, is the amount owed on it less than the sale price? Has the seller’s mortgagee consented to the land contract? If not, the seller’s mortgagee may commence a foreclosure action against the seller and buyer. The buyer will also want to make sure that the land contract is recorded at the Register of Deeds in the county where the land is located.
History indicates that land contracts can be useful instruments to facilitate land transactions during times of economic stress. However, as this brief review illustrates, there are many issues for both the buyer and seller to consider before entering into a land contract. Hence, each should consult his or her own lawyer before agreeing to such a purchase.