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.