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How Installment Land Contracts Work
When it comes to creatively financing real estate, especially with seller financing, it’s never easy to convince an owner to give up the deed when his debt obligation concerning the property is not fully settled.
The fear is that even with the most tightly written contracts, buyers can refuse to adhere to the agreement and enforcement can be a problem.
When this is the case, an option is to purchase a property with an installment land contract (ILC).
Different places might have different ways to describe an ILC. Some include:
- Bond for deed
- Contract for deed
- Agreement for deed
But they all mean the same thing.
This is basically a legal contract that enables the seller to continue holding the title until the balance owed on the property is fully paid off.
For example, if the house is currently financed by a bank with a typical mortgage, the title will only be transferred to the new owner after the balance is paid off.
The buyer in a land contract would acquire control over the house and become responsible for it’s taxes and upkeeping. But the seller’s name will continue to be on the title until the debt is repaid.
Such a contract would usually include a forfeiture provision term which the seller can legally take action against a buyer like how a landlord might take action against tenants who default.
While enforcing these provisions in court have turn out to be challenging from real life cases, the fact that a seller retaining title to the property serves as a strong psychological leverage that sellers can use in negotiation and relationship management.
In legal terms, an installment land contract technically makes the title a security to protect the seller’s interest until the purchase price is fully satisfied.
In this way, the seller retains an interest in the property which has an equitable conversion.
The buyer, while being the owner of the property, will have an equitable title and will possess the legal title upon settling the debt via a legal title merge.
Biggest benefit of land contracts
Conducting transactions in this complex manner has it’s advantages. Otherwise investors would shun it at all costs.
The biggest benefit of all is that such deals can remain as anonymous as legally possible.
The reason why this is a very attractive proposition to investors is that the anonymity makes it difficult for a lender holding a mortgage to learn about the deal. This mitigates the possible risk of a lender triggering a due on sale clause.
However, even if a lender do find out about the sale, a land contract does not necessarily constitute a breach that justifies triggering a loan call back. Because it might not be considered a sale!
It all depends on the details of the land contract.
Biggest problem with land contracts
While the benefits of land contracts can make real estate investors rub their hands with glee, there is also a very big disadvantage of using it.
That is the uncertain and sometimes ambiguous nature of the legal rights of both parties.
Various states have very different rules regarding how these agreements are interpreted.
For example, some states treat such deals as a mortgage transaction while others might see it more of a purchase transaction.
A simple difference in these terms can have very big implications.
When in doubt drafting installment land contracts, you should always consult the expertise of a real estate attorney familiar with local real estate laws for help.
Failing which can lead to grave consequences should either party decide to seek legal redress for one reason or another.