Land Contracts in Wisconsin: What are they?

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What is a Land Contract

A land contract is a form of seller financing. It is a written agreement by which a seller, or “vendor,” promises to convey to the purchaser, or “vendee,” real estate upon the completion of certain obligations, typically on an making payments under an installment payment plan.  It allows the parties to negotiate a sale when conventional financing is not available to the buyer, or is not feasible.  Because it is a negotiable contract, the parties can benefit from better interest rates (and a better rate of return on investment), payment terms and minimal loan costs.  In addition, a seller can sometimes control the amount of capital gain from the sale, and even use the sale as a stream of income for the term of the land contract.

The land contract purchaser takes possession of the real estate and agrees to make installment payments of principal and interest, typically on a monthly basis, until the contract is paid in full or balloons. During the term of the contract, the purchaser has “equitable title” to the property.  The vendor has legal title to the property until the contract is paid in full, and then must convey the property by deed to the purchaser.

The land contract is recorded with the Register of Deeds, giving notice to all of the vendee’s interest in the real estate and the vendor’s obligation to convey the real estate upon full payment.  The transfer fee is due at the time the land contract is recorded, along with a transfer return.  When the buyer conveys the real estate by deed, no additional transfer fee is collected, although another return will need to be delivered.

Provisions found in a Land Contract

Careful review of the specific contract is always necessary.  The State Bar of Wisconsin has a standardized form of land contract known as “Form 11” which lays out a template for the agreement. The contract can be altered on many ways. It is entirely negotiable as there are no statutory requirements or restrictions like traditional mortgage loans.

In considering a land contract transaction, you will need to determine the following terms at a minimum: (i) purchase price; (ii) down payment, if any; (iii) interest rate; (iv) first payment (often upon execution of the land contract); (v) frequency of installments (typically monthly); (vi) amount of installment and amortization; (vii) maturity date; (viii) restrictions on prepayment; (ix) if either party can mortgage, sell or assign its interest in the land contract; (x) which party is responsible for real estate taxes and insurance during the term of the land contract; (xi) whether there are existing mortgages on the property and if lender consent is required; (xii) which party will pay for recording the contract and the transfer fee.

There are also provisions regarding events of default and period to cure the default; the use of and improvement to the property during the term of the land contract; and the obligation of seller to provide title information.

Default Remedies and Cancellation

If the purchaser / vendee fails to comply with the terms of the land contract, often by failing to make payments when due, the seller has a number of means to remedy the default.  He may commence a lawsuit for the balance, or each delinquent payment as it comes due in the case where there is no acceleration clause in the contract.  This is most akin to suing on a promissory note since the seller can get a money judgment and then enforce the judgment through typical collection efforts, such as garnishing wages or levying assets.

Alternatively, the seller may commence a lawsuit to terminate the land contract and extinguish the purchaser’s interest, similar to a quiet title action.  This approach makes sense where a purchaser has left the property, or “abandoned” it, and the seller simply needs title to be clear to pursue selling to another party, or take other measures.

The vendor may also sue for specific performance of the land contract, keeping the purchaser on the hook for the full sale price.  Again, this works similar to a mortgage foreclosure, where a deficiency judgment can be entered against the purchaser following the sheriff’s foreclosure sale.  Like the foreclosure of a mortgage, there is a period of redemption whereby the purchaser could save her investment and the vendor would have to deliver a deed to the property.  The unique aspect of the land contract foreclosure is that the period of redemption is not set by statute (other than to require a minimum of seven working days,) but is determined on a case-by-case determination by the circuit court.  In most cases the court sets a period that is less than the conventional mortgage redemption period of six or 12 months.

Most frequently, the seller uses the remedy of “strict foreclosure” to terminate the contract. In strict foreclosure, the seller decides to terminate the land contract, assume possession of the property and clear title.  In the lawsuit, he asks the court to set a period of redemption during which the balance of the purchase price must be paid, or, the contract will cancel and title to the real estate (including the equitable interest of buyer) reverts to the seller without any further adjudication or sale.  In exchange, the seller gives up the right to collect the balance of the purchase price or any deficiency judgment, but may still recover fees and expenses relating to the foreclosure.  If redemption expires and the purchase price has not been paid, the seller’s attorney files an affidavit to this effect and asks for an order from the court confirming the judgment.

Of course, the land contract will dictate which remedies are available to the seller; yet another reason to review the specific contract carefully before entering into it.

The Land Contract is a Really a Sale subject to Seller Financing

A common misconception among parties to land contracts is that the “sale” has not yet occurred at the time the land contract is signed and filed since the seller will not required to deliver the deed to the buyer until some point in the future. Actually, the sale of the property for real estate tax purposes occurs when the land contract is executed and possession is delivered to the buyer.

Under Wisconsin law, the seller has conveyed his ownership interest in the property and retains “bare legal title” as the seller’s security interest in the property. The purchaser becomes, for all practical purposes, the owner of the real estate.  The vendor retains legal title, but that title is really only held as security for payment.

16 Responses

  1. Carl leis says:

    Need help putting together a land contract proposal for a farm in thorp Fsa say it my best option to get started

  2. Walter Shannon says:

    Hi Carl.

    Greetings to you up in Thorp. Nice area. My brother is from Brackett. Love the area.

    One thing to keep in mind is that the FSA should always be brought in when working with farm transfers. It is key that whatever you decide to do … you really consider their rules and draft accordingly before you move ahead with a deal.

    As for a land contract, there are many pluses and minus to consider with those. Do not enter into one without having the person helping you tell you the whole story about how they work. Be sure to ask for an overview of what happens when the party paying defaults and you have to take the land back.

    Feel free to give us a call to discuss your options.

    Take care.

    Walter Shannon

  3. Beth says:

    I’m trying to find an owner who is willing to do a lad interact with me. I have bad credit, but I’m working with Lexington Law to improve our scores. But until we can get up to at least a score of 589; we wontbeabketo purchase. A land contract seemos like our only option. Can you direct me in Any way?

    • Walter Shannon says:

      Hi Beth. We do not have a way to locate a seller for you. That would be a realtor in your area. Land contracts may seem appealing, but they have some drawbacks for buyers in your position. One drawback that occurs to me right away is the interest rate. Because the seller is not a bank or credit union (they can spread risk over a larger pool of borrowers),he or she is taking a much bigger risk and will need to charge a much higher rate of interest to have the land contract make economic sense. In addition, most sellers will need a rather large deposit down in order to have a land contract work for them. Both of these items seem like they would be problematic for you in your current financial condition. You might rather try to work out a “rent to own” agreement with a landlord. Those are really rental agreements where you retain an option to buy at some later date. The landlord might give you a credit for some of your past rent toward the ultimate purchase price. Good luck.

  4. Donna Hesbol says:

    I am a real estate investor in the Milwaukee area. When I purchase a property, I buy it under my business LLC. Can an LLC do Land Contracts and receive a balloon payment after an agreed term to complete the sale? The Dodd Frank bill scares me.

    • Walter Shannon says:

      Hi Donna.

      Sorry so late in responding. This part of our site was down for awhile. Yes. sometimes LLCs can be the vendor under land contracts in Wisconsin. However, yes …. you should be very careful relative to Dodd-Frank if you choose to go that route. Below are some quick thoughts on it.

      Sometimes, due to Dodd-Frank, sellers who finance their real estate transactions by a land contract must be a licensed mortgage originator or include a licensed mortgage originator in the transaction to make it work. This is particularly trust for LLC vendors. Many land contract vendees in Wisconsin are exempt though. Most are individuals who act as the vendor and keep their transactions to one a year – for balloon payment scenarios and three a year for non balloon payment scenarios.

      LLCs, on the other hand, have to be careful regarding the details of the transaction. They may be exempt from these rules if certain criteria are met. Those rules are complicated and I would suggest that you reach out to a local attorney in your area and have that attorney review any transaction you plan to pursue. I often suggest that LLCs avoid use of a land contract when selling and have the buyers use conventional loans through a bank or credit union instead. It is always better safe than sued.

  5. Jeff Morgan says:

    I am considering selling a second home on a land contract to an individual who may potentially go through a divorce. Would the buyers interest in the the land contract be considered an asset that may have to be part of a divorce settlement?

  6. Annie L. Meyer says:

    We would like to sell some land we own to our son on a land contract instead of outright sale due to capital gains. Do we have to charge interest? If so, what is the minimum rate?

  7. Mary says:

    We have a commercial property that we’re selling to the current lessee under a land contract. We’re unsure what interest rate to start at. Thinking 1% above prime with 20% down and then moving upward at quarter increments with each $5000 less in down payment. Can we request a credit report from the lessee? What other items should we request from the lessee? We would be willing to amortize over 15 years with a balloon payment after 5 years or renew/renegotiate land contract terms.

    • Walter Shannon says:

      Hi Mary. The terms you mentioned for the Land Contract all seem reasonable. I would suggest a higher interest rate though.I suggest that because you, unlike a bank or credit union, are not in the lending business. If there is a default and you have to foreclose, the costs and headaches are substantial. A lending institution can more readily absorb those costs due to the volume of loans and and other aspects of their processes. Perhaps more money down too if possible.

  8. Debbie says:

    I had a land contract that went to court and there was a strict foreclosure. We live in the apartment. What happens now if we have not moved out but an order for strict foreclosure was granted. I have a place we will be moving but it is not available until March.

    Thank you

    • Walter Shannon says:

      Hi Debbie. Sorry to hear that you were not able to keep up with the payments. Happens to many Vendees, my friend. Statistics show that defaults are high for land contracts. Not saying that this is your story of course … but the high rate of foreclosures seems to be related to the fact land contracts are often established between the parties because the bank or credit unions would not offer financing to the buyer. I am sorry for responding so late to your comment … my site was giving me trouble recently. The court will issue a writ which authorizes the sheriff (on behalf of the Vendor) to remove you if you are not out as directed in the court order. That is never fun. Avoid it if possible. Best of luck in the future.

  9. Chuck says:

    I purchased my house under a land contract in February 2015 and the seller is refusing to file the contract with Douglas county. I have asked for 4 years for them to do it I have gone to the deeds office and got the paperwork and offered to pay for it and they refuse. I have invested a lot of money into the house and can’t walk away. What can I do?

    • Walter Shannon says:

      Hi Chuck. What is the seller saying is the reason for not filing the land contract? Here is what I see happening sometimes … when a mortgage is already recorded against the property from a bank or credit union, the subsequent land contract will be subordinate to the earlier filed mortgage loan. Your vendor (“vendor” is the seller, you as buyer are a “vendee”) needs to obtain the consent of the bank or credit union when he or she sells a place that is subject to a mortgage. If the Vendor fails to do this, the “due on sale” clause found in mortgage documents may require payment of the remaining balance on the mortgages in full (Acceleration) as soon as equitable title is transferred via the land contract. In your case, it could be that the vendor is not filing the Land contract to avoid this issue. I do not think that the failure to file a land contract prevents the due on sale clause from kicking in. A sale is a sale, whether the land contract is filed with the register of deeds or not. Maybe you should call the Vendor and suggest that he or she talk to the mortgage bank for the needed consent and get the land contract filed. I like to see the land contracts filed in order to protect the ownership interest the vendee holds from an innocent purchaser who buys the land after a legitimate search made by a title company. Good luck.

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