Why pick a land contract over a traditional mortgage?
In a market of uncertainty where job security is fading, buyers who want to take advantage of the current market prices may consider land contracts. Land contracts provide a way for buyers with less than ideal credit or who don’t qualify for conventional financing to own a piece of property they otherwise could not afford. Conversely, it also allows the seller a means to cover their property payments and cost of maintenance.
Issues in land contracts
Before signing a land contract there are several considerations to keep in mind: (1) Does the purchase price exceed the value of the home? (2) Does the seller know the necessary procedures to regain possession? (3) Will entering into the contract trigger a mortgage default? (4) Has the buyer obtained proper insurance and have the property taxes been paid? (5) Is the seller in arrears on the underlying mortgage or property taxes?
(1) Does the purchase price exceed the value of the home?
As a buyer, you should always know the appraised value of a home. Buying a land contract is no exception. As the buyer, you run the risk becoming upside down on a home. Then, with a balloon loan, at the due date for the balloon payment you run the risk of needing to have cash to pay the difference between what the note states and the amount the bank is willing to finance (usually pegged below what the home is worth). And if you cannot make up this difference in cash, the seller can declare default, and even though your payments have been on time, you will lose possession of the property.
(2) Does the seller know the necessary procedures to regain possession?
As a seller, you should be aware that getting your home back following a default is not as simple as just “kicking” the buyer out. If the buyer misses a payment today, you cannot kick them out of the house tomorrow. To evict a buyer in a land contract dispute, Michigan law requires that you seek court approval. Even though Michigan law allows for a shortened time frame for doing so, the court does not always hear your case quickly. Basically, you may have to wait for three to six months before regaining possession. Therefore, as a seller in a land contract deal, you should always have a fund large enough to cover the mortgage and taxes on a property in case of buyer default.
(3) Will entering into the contract trigger a mortgage default?
While selling a home you can’t afford sounds like a great idea, sometimes it can put you in a worse position. Most mortgages have “due on sale clause,” which requires the seller to get approval to sell a home on land contract. The seller’s failure to get the mortgage company’s approval may result in default. This is because the mortgage company considers land contracts as transfers of property and therefore call the note pursuant to their “due on sale clause.” If the seller cannot pay the amount left on the note, then a default occurs.
Entering into a land contract where the mortgage has not been properly dealt with or the mortgage company does not approve is very risky to the buyer. You should always have an attorney approve and look over a land contract and any mortgage on the property before buying.
(4) Has the buyer obtained proper insurance and have the property taxes been paid?
Buyers usually assume the responsibility for taxes and insurance protection on a home or property in a land contract. The seller generally requires the buyer to pay for taxes and obtain insurance in the land contract. However, often sellers do not confirm that buyers are following through.
The buyer’s failure to obtain insurance or pay taxes on a property may cause foreclosure because of a tax lien or uninsured loss. However, as a seller, you can avoid these issues by including a number of provisions and check-ups in the agreement, which allow inspection and careful monitoring of the buyer.
(5) Is the seller in arrears on the underlying mortgage or property taxes?
As a buyer you should be aware of the underlying mortgage. Often when a mortgage is foreclosed on despite on-time payments to the seller, it is because the seller is taking the buyer’s monthly payments and pocketing them instead of applying them to the mortgage.
Land contract fraud often arises where the underlying mortgage is an adjustable rate or ARM mortgage. In these cases, the mortgage rate will often exceed the interest rate the seller is charging the buyer. When seller eventually defaults, banks have the first position and trump the buyer’s possessory interest in the property.
An attorney can help buyers and sellers avoid this situation through titles searches. An attorney can also help a buyer or seller with transfer taxes, buyer worthiness checks, down payment structuring, inspection clauses, improvement liens, and many more contractual clauses.
Land contracts, even with their pitfalls, can be a great way to take advantage of the current market or sell an existing property. Before starting or investing in a land contract, contact our experienced legal team in Grand Rapids @ 616-698-0000 or www.clickforhoward.com