What is an installment land sales contract?
In an ordinary house or land sale, title is put in the buyer's name on the date of sale. But with an Installment Land Sales Contract, the Buyer doesn't get title to the land until all the payments have been made. An installment land sales contract is an agreement to buy land over time, without transferring title to the land until all the payment have been made.
The Seller agrees to allow the Buyer to pay the purchase price over a period of time in installment amounts.
Until the purchase price is paid in full, the Seller keeps legal title to the property. This protects the Seller in case the Buyer doesn’t make all of the payments.
When full payment is completed, then the Seller gives the Buyer a deed transferring legal title to the property.
Usually, the Buyer takes possession of the property after signing the land sales contract. The Buyer can stay there as long as he lives up to the contract and makes all payments to the Seller.
What are the advantages of an installment land sales contract?
Advantages to Seller: It may be easier to sell the property if potential Buyers don’t have to go through normal banks and lenders.The Seller is protected against the chance that the Buyer doesn’t make payments, because the Seller keeps the title to the property until all payments are made. The Seller doesn’t have to go through foreclosure proceedings to get title back in his own name.
Advantages to Buyer: The Seller is financing the Buyer’s purchase of the property. The Buyer may not be able to qualify for a loan through a conventional lender or may be unable to afford the cost of obtaining an institutional loan. Often, installment land sales contracts require less up-front cash from Buyer at the time of purchase.
What are the disadvantages of an installment land sales contract?
Disadvantages to the Seller: The Seller does not get full payment immediately. He has to wait for all the payments to be made. If the Buyer does not make the payments, the Seller may still have to file a lawsuit to remove the Buyer from the property.
Disadvantages to the Buyer: The Seller himself may still owe money on the property. If so, the Buyer’s rights will be limited by the existing debt. If the Seller fails to make his payments, then the original lender could foreclose and the Buyer would lose the property even though she had made all payments to the Seller. In the event of default or failure of the Buyer to follow the terms of the agreement, the Buyer could lose everything she has put into the property. The Seller may:
- terminate the agreement;
- retain title to the property;
- keep the deposit;
- keep all installment payments paid up to that point;
- keep all the improvements to the property made by the Buyer.
In rare cases, the amounts paid by the Buyer may be far above “fair rental value” for the time they have occupied the property. If the excess unfair payment “shocks the conscience” of the court, it is possible that the Buyer could get some of her money back. But that is rare and would require going to court.
What steps should buyers take to protect themselves before signing an installment land sales contract?
(1) Review the contract with an attorney:
Read and understand every bit of the land sales contract before you sign it! A lawyer can explain to you exactly what each paragraph in the contract means for you.
The Seller should provide a copy of the proposed contract for the Buyer to review with an attorney. If the Seller won’t cooperate with this, then walk away.
The installment land sales contract should be clear. If it isn’t clear you won’t be able to enforce it. A lawyer will help assure that the terms are clear.
(2) Get a title examination of the property:
Of course you want to get clear, clean title to the property. The Seller promises you that the title is clear, with no liens or judgments or debts attached to it. But how can you know this is true? By having an attorney examine the title to the property.
The lawyer will determine who owns the property. The title examination will confirm whether the Seller is the only owner of the property, or whether there are other persons who hold any kind of interest in the property. If so, the Buyer will need those people to sign the installment land sales contract along with the primary Seller.
The lawyer will determine whether there are any liens and “encumbrances” affecting the title to the property.
The title attorney will issue a report on the title that identifies:
- all of the owners of the property (who will need to sign the installment land sales contract);
- any liens affecting the title to the property that need to be eliminated, paid or assumed;
- whether the property taxes have been paid or are delinquent; and
- any other problems in the land records that affect the title to the property.
(3) Determine the condition of property:
Before signing the installment land sales contract, the Buyer should inspect the property. Make sure that all systems and appliances are in good working order. If possible, the Buyer should engage a professional or certified home inspector to conduct a thorough inspection of the property.
The inspector will provide the Buyer with a report of the inspector’s findings. This report will address items most Buyers would not notice or appreciate, such as:
- roof damage
- plumbing leaks or problems that may require repair or replacement in the future
- furnace and air conditioning systems age and working order
- lead paint
- radon gas
- whether the property is located in a flood plain
- termite or pest problems or damage
- structural problems
You should carefully consider the condition of the property. Ask yourself if you can afford to pay for the property and the costs of likely repairs or replacements?
What are the basic legal requirements for an enforceable installment land sales contract
The contract must be in writing.
The contract must be signed by all of the Sellers and all of the Buyers.
The signatures must be notarized.
What steps will protect both sides?
Each Buyer and Seller should have a fully signed copy of the contract.
The original signed contract should be filed (or “recorded”) in the official county land records. These are in the office of the Clerk of the County Commission in the county where the real estate is located.
“Recording” the installment sales agreement tells the world that the Buyer has an interest in the real estate. With this protection the Seller will not be able to sell the same property to someone else. Also, the Seller will not be able to borrow more money using the property as collateral unless the Buyer agrees in writing.
Recording the contract also means the Buyer’s rights will have priority over any later court judgments or other liens that may be placed against the Seller’s title to the property.
The contract should say that the Buyer can record the contract.
What should the Contract say about the Purchase Price?
The installment land sales contract must include:
- The exact amount of the total purchase price of the property;
- How much deposit or down payment the Buyer will have to pay at the time the contract is signed;
- The interest to be charged to the Buyer ;
- The amount of the monthly payment of principal and interest;
- The date on which each payment is due;
- The length of time the payments will continue;
- The date when the balance of the purchase price is due
- The contract should require the Seller to provide the Buyer with an “amortization statement.” This is a listing showing:
- The amount of each payment payable under the contract;
- The date each payment is due;
- The amount of principal to be paid in each payment, and the amount of interest in each payment; and
- The date when the last payment is due.
For tax purposes, the contract should also require the Seller to give the Buyer each year a written statement of all principal and interest that was actually paid by the Buyer during the last calendar year.
What should the Contract say about the Description of property?
The property being sold should be clearly described in the installment land sales contract. You don’t want any question about what real estate is the subject of the agreement.
The best way to describe the land in the contract is to use the “legal description” in the deed that gave title to the Seller. The attorney who examines title for the Buyer can get the original Seller’s deed and the accurate description of the property.
The description also should include the street address for the property.
What should the Contract say about the transferring title to the Buyer?
The installment land sales contract should state in detail when the Seller will be required to deliver a deed transferring title to the Buyer. Normally, the Seller does not want to deliver the deed until after the purchase price is fully paid by the Buyer. But how long should the Buyer have to wait for a deed after making full payment? What happens if the Seller dies or becomes mentally incapacitated before the deed is delivered?
The safest method is for the Seller to sign the deed to the Buyer at the same time that the Buyer signs the original installment sales contract. Then have a neutral third party (such as an attorney) hold the signed deed as long as the payments are being made. When the price is fully paid the attorney then gives the signed deed to the Buyer. If the Buyer fails to make the payments then the attorney returns the deed to the Seller.
If the Seller refuses to sign a deed until after the last payment is made, the contract should clearly specify the time limit for the Seller to deliver the deed of title to the Buyer.
The contract should specify that the Seller will provide a deed containing a “general warranty.” This means that the Seller guarantees that the title to the property he is selling is free and clear of all liens and encumbrances.
What other terms should be included in an installment land sales contract?
The installment land sales contract should be clear. It should state ALL of the terms and provisions of the agreement between the Buyer and Seller. Nothing should be left to verbal assurances and “trust me” status. Important terms to address in the contract include:
- Names and addresses for the Seller and the Buyer.
- Date of possession. That is the date when the Buyer can move onto the property. (This is usually upon signing of the contract.)
- Real estate taxes and insurance. Who will pay these costs on the property during the time the contract is being paid? The usual practice is that the Seller pays them until the Buyer takes possession of the property. The Buyer pays them beginning with the date that he takes possession of the property.
- Maintenance and repairs. Which party has to fix things that break during the life of the contract? For example, what if the furnace breaks down three months after the Buyer moves in? Who fixes it? (Again, usually the Buyer must handle all maintenance and repairs once he has taken possession of the property.)
- Items other than the land. Does the contract cover only the land, or are there buildings, equipment, vehicles or other items included in the sale? Is it the land only? Is it the land and any buildings but not the contents? Is it the land and the buildings and everything in the buildings? BE SPECIFIC.
- Mobile homes. What about any mobile home located on the land? If the contract is not clear, the courts will say that an installment land sales contract does NOT include a mobile home, because it is "mobile" and can be moved. But if the mobile home is permanently “affixed to the land” and taxed as part of the real property, it normally will be included in the installment land sales contract. If the mobile home is part of your deal, make sure the contract is clear what happens to it.
- Liens. The installment land sales contract should prohibit the Seller from putting any new or larger liens on the property without the Buyer’s knowledge and consent.
Are there special issues in Installment Land Sales Contracts where the Buyer assumes the Seller’s mortgage loan?
Suppose the Seller took out a loan and bought the property last year. Now he’s realized that he can’t afford the payments. So he wants to make a deal with you. “You take over the rest of the loan, and the property will be yours when it’s paid off,” he says. Sometimes assuming the Seller’s loan can be a good deal for a Buyer. Sometimes it can be a bad deal with a lot of hazards and risks. Be very careful with this kind of installment land sales contract.
First of all, realize that your rights as a Buyer will be "subject to" the higher, superior rights of the original lender who already has a lien on the property. You’d better find out who that lender is, what that lender's rights are, and whether that lender has the power to prevent you from entering this kind of agreement.
In fact, many lenders prohibit their borrowers from re-selling the property in this kind of installment land sales contract. The very act of signing an installment land sales contract with a buyer can be considered a violation of the original loan contract between the bank and the Seller, and grounds for a foreclosure. If you don’t know that, you may be moving into a huge problem. So you need to know exactly what the rights of the original lender are.
Second, you may be depending upon the Seller to “do the right thing.” Suppose the Seller wants you to make your payment to him, and says he will then make the payments to the bank. Once you pay him each month, how will you know whether he does in fact make the payments to the bank,on time and in full? If he does NOT make the payments to the bank when will you find out about it - as soon as it happens, or a long time later? In the worst cases you may not know there's a problems until after the foreclosure sale, when the foreclosure purchaser comes around and tells you to get out of his property. The same thing can happen if the Buyer is supposed to make the payments to the bank. How and when will the Seller know that payments were made properly or not?
These two potential problems should be clearly addressed in any installment land sales contract where the Buyer is going to “assume the payments.” Make sure of two things.
(1) That all sides including the original lender know about and accept the "assume the loan" Installment Land Sales Contract; and
(2) that both Seller and Buyer have an ironclad way of knowing that all payments are made as they are supposed to be. Usually this means that the person making the payment to the bank each month has to give the other party a copy of a receipt or other proof that the payment was made.
If you are considering an installment land sales contract where the Buyer will assume the Seller’s mortgage loan on the property, protect yourself. The Buyer should not agree to this kind of land sales contract without first contacting the Seller’s lender and confirming:
- the loan is “assumable” by a Buyer;
- the amount of loan you are about to assume;
- the interest rate of the seller’s loan;
- whether the loan is current or in arrears; and
- the payoff date when the seller’s loan is due.
An installment land sales contract involving assumption of a loan should contain a provision requiring all parties to provide proof to the other that each required payment was made, on time and in full.
If the Buyer is making payments to the Seller, the Buyer will want proof that the Seller made the payments to the bank, on time and in full.
If the Buyer is making payments directly to the bank, the Seller will want proof that the payments are being made to the bank, on time and in full.
An installment land sales contract involving assumption of a loan, where the Seller is to make the payments to the original lender, should give the Buyer a special additional protection. The Buyer should have the power to make payments to the bank if the Seller fails to make them. Those payments then would be counted as part of the Buyer’s installment land sales contract payments, even though they were not paid directly to the Seller.
What happens if the Buyer violates the Installment Land Sales Contract?
What happens if the Buyer misses a payment? The contract should provide that the Seller is required to give written notice to the Buyer of the missed payment (or any other default). Then the Buyer should be given a reasonable but limited period of time to make the payment (called "cure the default"). If Buyer cannot make the payments during the cure period, the Buyer loses his rights under the contract.
Some installment land sales contracts do not require the Seller to give the Buyer any 'notice of default' or any 'opportunity to cure.' These are very strict contracts, and are usually risky for Buyers. In those contracts, if the Buyer defaults the Seller may choose to keep all the money the Buyer has paid AND take the property back from the Buyer. The law calls this a “strict forfeiture” of all the Buyer’s rights under the contract.
Courts will permit “strict forfeitures” to happen most of the time. Courts will block a strict forfeiture only when the situation is so grossly unfair that it “shocks the conscience of the court.” Usually this is because the payments made by the Buyer have been far higher than any reasonable rental value for the use of the property. That doesn’t happen very often. Courts are inclined to implement the words of the contract, the way it is written, even if it's pretty one-sided. Buyers are better off simply avoiding these sorts of “strict forfeiture” installment land sales contracts in the first place.
The contract should provide that it will be binding on the Seller, and the Buyer, and their respective "heirs, successors and assigns." This protects the parties if someone dies. The contract is still enforceable against their estate or their inheritors.
What happens if the Seller violates the Installment Land Sales Contract?
What remedies does the Buyer have if the Seller defaults? The Buyer probably will have to go to court to ask for “specific performance” of the contract.
Suppose the Seller is backing out in the middle of the deal. He changes his mind, and wants to take the property back part way through the life of the contract. Now he’s trying to interfere with the Buyer’s possession of the land. Especially where the Buyer has made improvements to the property, and put money in beyond the monthly payments, the court can enforce the contract and order the Seller to quit interfering. As long as the Buyer is in full compliance with the contract, the contract should remain in effect.
Suppose full payment has been made and the Buyer has completed his part, but the Seller simply refuses to deliver a deed transferring title. The court can enforce the contract and order the Seller to deliver the deed. If the Seller still refuses, then the court can issue a deed transferring title to the Buyer even without the Seller’s signature.