A land contract is an agreement between the seller and the buyer for the purchase of real estate. A land contract involves financing through the seller, instead of financing through a mortgage company or bank. This gives both the seller and buyer more flexibility since neither is tied to stringent guidelines on financing terms and limits. Like any transaction, however, there is always risk involved. If your business invests in real estate, you should know the seller’s rights in a land contract mortgage to protect yourself from being burned.
Possession of Legal Title
The seller, or vendor, retains the legal title to the property with a land contract. The buyer, or vendee, obtains the right to possess the property as the land contract goes into effect. The vendee’s interest in the property is also known as “equitable title.” When the vendee finishes paying off the purchase price of the property, the vendor transfers the legal title to the vendee. This ends the contract and all involvement of the vendor.
The vendor has the right to hold a separate mortgage on a land contract property. In this situation, the vendee would make payments to the vendor as agreed in the contract. The vendor must then make the mortgage payments in a timely fashion. The main risk lies with the vendee in this situation because if the vendor defaults on the mortgage, the lender will foreclose on the property. This would result in the vendee losing all interest in the property.
A land contract often includes remedies for vendee default to protect the vendor’s interests and rights. A common remedy for breach of contract on the vendee’s part includes the termination of all vendee property rights. In addition, the vendor may keep all previously made payments by the vendee as liquidated damages. The vendor has the right to take possession of the property again. According to Megan Dorsey and David L. Rockwell, authors of “Financing Residential Real Estate,” courts cannot enforce land contracts uniformly. If the vendor must resort to legal action to evict a vendee after breach of contract, the court can reinstate the contract, give the vendee more time to pay the balance in full, or order the immediate sale of the property. In these situations, the vendor must comply even if doing so is a disadvantage.
Some land contracts include a provision for strict foreclosure. In this situation, the vendor has the right to demand the balance of payments due immediately if the vendee is late with or misses just one payment. Because most vendees will be unable to pay the remaining balance, the vendor has the right to regain physical possession of the property without the need of foreclosure proceedings. If the vendee has a satisfactory payment history up until this point, it might be possible to petition the court for leniency – an extension or reinstatement of the contract.
- "Financing Residential Real Estate;" Megan Dorsey and David L. Rockwell
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