Land Contract

A land contract is a financing contract between a seller and buyer of real estate. It is a legally binding contract under which the seller, also referred to as the vendor, agrees to finance a portion of the purchase price for the purchaser. With a land contract arrangement, the purchaser takes possession of the property and becomes the owner in equity, but the seller retains legal title to secure the outstanding balance until the purchase price is paid in full.

Information Contained in a Land Contract

The terms and provisions of a land contract are legally binding. The specific terms of a land contract will vary depending upon the circumstances of each transaction, and it is not possible to address them all in this article. But some of the basic matters to be addressed include the proper identification of the parties; a full and accurate legal description of the property; the purchase price, down payment, and interest rate; the length of the contract term and the amortization period; any balloon payment requirement; and whether the contract can be prepaid without a penalty.

The parties to a land contract should also discuss and address other matters such as the existence of any outstanding mortgages and possible due-on-sale provisions; any outstanding assessments or liens against the property; whether a title insurance policy will be obtained or provided; how real estate taxes, assessments, utilities and dues will be paid; the amount and type of property insurance that will be maintained; and whether any covenants, restrictions, or zoning regulations affect the property.

When parties decide to enter into a real estate transaction that involves a land contract, it is recommended that they also engage in the negotiation and execution of a purchase agreement for the property. While the land contract document addresses the terms of the financing involved, the purchase agreement will go beyond this to address the various other important legal issues that pertain to the real estate transaction, such as the seller’s representations to buyer concerning the potential defects or conditions affecting the property; the need for property surveys, inspections or tests; who is responsible for damage to the property prior to closing; contract contingencies; the termination rights of the parties; the proration of real estate taxes, assessments, utilities, association dues, and rents; the remedies of the parities in the event of a breach of the contract; and other important terms that may affect the transaction. Due to the importance of these formalities and provisions, it is essential that an experience real estate attorney be consulted before a person enters into a purchase agreement or land contract.

When the Buyer Defaults

In Wisconsin, when the buyer fails to honor the terms of a land contract, the seller (vendor) can pursue one of the following remedies:

1. Seller may bring an action for specific performance, requesting that the court order the sale of the property to the highest bidder at a sheriff’s sale. Under a specific performance proceeding, the court usually grants to the buyer a reasonable redemption period, which is the time the buyer has to cure the default. If the buyer fails to redeem during the time allowed, and the property is sold for less than the amount outstanding on the contract, the court may grant to the seller a deficiency judgment against the buyer.

2. Perhaps the most common remedy used by a seller is strict foreclosure. The strict foreclosure remedy is used when a seller wishes to regain possession of the property and foreclose the buyer from all equity and legal title. The buyer is usually granted a period of redemption during which he or she can make up the delinquent payments, or if the contract contained an acceleration clause and the seller accelerates, the buyer must pay the full amount necessary to satisfy the contract. If the buyer fails to cure the default during the redemption period, the court confirms judgment in favor of the seller and legal title to the property reverts to seller. Because the property is returned to seller, the land contract is terminated and the seller gives up the right to collect any remaining balance or deficiency.

3. Another option is for the seller to bring an action to declare the land contract to be at an end. This is usually referred to as a quiet title proceeding, under which the full title to the property may be restored to the seller. This remedy may be pursued when the buyer’s interest and equity in the property is considered to be insignificant, such as situations when the buyer has made a minimal number of payments toward the contract.

4. Lastly, the seller may choose the option to sue the buyer for any unpaid installments. Under this remedy, the buyer retains the equitable title to the property, but the seller may obtain a judgment against the buyer for the balance due. However, there is no guarantee that seller will be able to satisfy the judgment from the buyer’s assets.

Important Considerations

When considering whether to use land contract financing to sell or purchase property, the parties involved should consult with a qualified attorney to discuss all of the legal consequences of such a transaction. There are also other important considerations that parties often overlook, such as how land contracts affect capital gains tax obligations; whether the party’s estate plan should be revised to accommodate the land contract; and how the land contract may affect a party’s eligibility for Medicaid if he or she ever needs assistance with long term care costs. Contact Attorney Stephen Kosa today to address all of your questions about land contracts.