assignment of seller's interest in land contract michigan

An Overview of Land Contracts

Land contracts are a way of buying a home without a mortgage. Leases with the option to buy and rent-to-own housing contracts are also ways of buying a home without a mortgage. To learn more about those types of contracts, read Leases with the Option to Buy and Rent to Own Contracts .

While not having a mortgage may sound good, land contracts usually have fewer protections for buyers than mortgages. Land contracts usually involve private sellers, not a bank or other financial institution. A land contract should outline what the buyer and seller are supposed to do. It will also say what will happen if one party breaches (doesn’t follow) the contract.

What is a Land Contract?

A land contract is a contract between a buyer and private seller for real property that has a home on it. With a land contract, the buyer does not get full ownership of the property. The buyer is an owner, but they only get “equitable title” of the property. Equitable title is the right to obtain full ownership of property. This is different from legal title, which is actual ownership of property. The buyer will not get legal title until the total purchase price is paid.

Land contracts can make property easier to sell because the seller decides the credit requirements and down payment amount. The parties can also negotiate the monthly payments, including whether there will be a balloon payment. A balloon payment is an unusually large payment due at the end of the purchase period. The parties will also agree on the interest rate. However, in Michigan the interest rate cannot be above 11%. It is possible for the interest rate to change over time, but the average interest rate has to be 11% or less.

In general, the buyer is in charge of making all repairs and paying property taxes in most land contracts. Most contracts also say the buyer must get homeowners insurance.

What Happens if the Buyer Breaches the Contract?

The most common type of land contract breach by a buyer involves payment issues. Any missed or partial payment can cause problems for the buyer. If a buyer misses a payment or doesn’t make the entire payment, the seller can take action. The most common action (called a “remedy”) a seller takes is to forfeit (cancel) the contract. A much less common remedy is foreclosure. A seller can use either remedy for any breach of the contract.

The Seller Can Forfeit the Contract

Most land contracts have a forfeiture clause. A forfeiture clause usually says that if the buyer breaches the contract, the seller can keep all money paid to it. The seller can also take back possession of the home. The seller cannot forfeit the contract without a forfeiture clause.

The first step in the forfeiture process is for the seller to send the buyer a forfeiture notice. The notice can be served in either of the following ways:

In person, by giving it to the buyer or someone living in the home old enough to accept it, with instructions to give it to the buyer

By first-class mail to the buyer’s last known address

This notice must give the buyer at least 15 days to cure (fix) the breach. The buyer can cure a payment breach in a forfeiture by paying the amount in arrears (all the past due payments). The buyer could also voluntarily move out and give up the home. The buyer cannot be forced to move out until much later in the process.

If the buyer voluntarily moves out, this does not cure the breach. The seller could still start a court case. The only way to cure the breach is to pay the amount in arrears or address the breach in another way. However, the seller might only be interested in getting the home back.

If the 15 days pass and the buyer does not cure the breach or move out, the seller can start a court case. They must file a summons and complaint in district court and serve a copy on the buyer. The complaint must list all of these:

The original selling price

The balance remaining

The amount in arrears (past due)

A statement describing any other breaches that would support a forfeiture

The seller must also attach a copy of the notice of forfeiture, showing when and how it was served.

The buyer must respond to the complaint. If the buyer does not, the judge could enter a default judgment against them. A default judgment means the seller could get everything they ask for without a judge ever hearing from the buyer. The summons should have the date the buyer needs to go to court. The buyer can go to court and verbally respond at the hearing or file a written answer or motion with the court. It is best to file a written answer or motion before going to the hearing, but that is not required.

In a payment breach case, if the judge rules for the seller, they will issue a judgment for the amount it determines is past due. The buyer will be able to keep the home by paying the seller or the court the amount listed due in the forfeiture judgment. The amount of time the buyer has to make the payment is called the redemption period. The redemption period is 90 days if the buyer has paid less than 50% of the land contract. If the buyer has paid 50% or more of the land contract, the redemption period is six months. The seller can’t evict the buyer until after the redemption period is over.

Any payments the buyer makes during the redemption period should first be applied to the judgment amount. If the buyer makes payment(s) during the redemption period, there must be a hearing before the seller can get an order of eviction. Even if the buyer doesn’t make new regular monthly payments that come due during the redemption period, they cannot be evicted. However, the seller could file another forfeiture case if those payments remain unpaid after the judgment is paid off.

If a forfeiture judgment is entered against the buyer, and they plan on leaving the home, they may choose to not make their usual payments during the redemption period. If the seller only wants to recover the home, then not making the usual monthly payment may be a good plan. However, the seller could choose to seek damages from the buyer under the contract.

The Seller Can Foreclose on the Home

If a buyer breaches a contract by getting behind on payments, another remedy the seller may have is foreclosure. Most land contracts have acceleration clauses. These clauses allow the seller to declare that the entire remaining balance of the contract (not just the past due payments) is due if the buyer misses a payment. In other words, the buyer will have to pay whatever they are behind plus the rest of the contract amount.

Most acceleration clauses require the seller to give the buyer written notice of an acceleration. The notice will say that the seller will declare an acceleration if all past due payments are not paid by a certain date. If the buyer does not pay all past due payments before the seller declares an acceleration, the seller can start a foreclosure case in circuit court.

Even without an acceleration clause, the seller can try to foreclose on a home after a breach. If the contract doesn’t have an acceleration clause, the buyer can prevent a sale by paying all amounts due, plus costs. However, if the seller misses any future payments, a sale could go forward.

A seller needs to go through circuit court to foreclose on a home. Unlike mortgage foreclosures, a seller in a land contract cannot foreclose by advertisement. They must go through the courts. To learn more about judicial (court) foreclosures, read Foreclosure and Eviction for Homeowners .

If a judge agrees that a debt exists, they will enter a judgment in favor of the seller. The judgment will order a sale of the property, called a Sheriff’s Sale. Once a Sheriff’s Sale happens, if the buyer wants to keep the home, they must pay the entire Sheriff’s Sale price. The buyer can find the sale price by getting a copy of the Sheriff’s Deed from the Register of Deeds in the county where the home is located. The redemption period for this type of foreclosure is six months from the sale.

If someone bought the home during the Sheriff’s Sale for less than the full amount of the land contract, the land contract buyer may have to pay the difference.

Eviction From the Home

After the redemption period following a foreclosure sale ends, the land contract buyer can be evicted from the home. To start an eviction, the new owner must file a summons and complaint in district court, and serve copies of them on the land contract buyer. To learn about the eviction process, read the articles Eviction: What Is It and How Does It Start? and Eviction to Recover Possession of Property .

The land contract buyer is not likely to have a defense to an eviction case because it would have been necessary to raise any defense in the circuit court foreclosure case.

If the judge orders an eviction, the land contract buyer usually has 10 days to leave the home. They can ask the new owner for more time if they have special circumstances. If the land contract buyer stays, the judge could issue an order instructing the sheriff or a court officer to evict them and remove their belongings from the home.

Cash for Keys

If a land contract buyer knows they won’t be able to pay the redemption amount, they can ask if the new owner is willing to work out a “cash for keys” deal. In a “cash for keys” deal, the land contract buyer leaves the home before the redemption period ends in exchange for money. Some new owners will do this because they can get the home faster, and they won’t have to pay the court costs and lawyer’s fees for an eviction case.

Help for Buyers

If you are facing losing the home you purchased through a land contract, you may be able to get some help from Michigan’s State Emergency Relief Program (SER). Visit the Home Ownership Service page on the Michigan Department of Health and Human Services website to learn more.

What Happens When the Seller Breaches the Contract?

A common way land contract sellers breach the contract is by refusing to transfer title of the home when the buyer pays off the contract balance. When this happens, the buyer can file a “quiet title” complaint in circuit court. This asks the judge to either order the seller to transfer title to the home or declare that the buyer is the titleholder. The buyer can only do this after making the final payment.

The buyer could also file a complaint asking the judge to cancel or “rescind” the contract. If the contract is rescinded, the buyer would be entitled to get back money paid to the seller. The buyer would then have to surrender any claim to ownership of the home.

Both of these actions are complex. You may want to speak with a lawyer if you are thinking of starting one of these lawsuits. Use the Guide to Legal Help to find lawyers or a legal services office in your area.

Common Issues for Buyers in Land Contracts

Before a buyer signs a land contract, they should do a title search at their county’s Register of Deeds to make sure the seller has good title to the home. There could be existing liens on the property or other things that limit a buyer’s rights to the property. If the seller has clean title, the buyer may want to record their interest in the property at the Register of Deeds to make sure their interest is protected.

Sometimes homes for sale by land contract require a lot of repairs. Before signing the contract, the buyer should thoroughly inspect the property to see what repairs are needed. It is best to have an expert do this because most land contracts require the buyer to make all repairs and maintain the home.

A buyer should be cautious with subordination agreements. These agreements allow the seller to give others interest in the property that is superior to buyer’s. If you have questions about these agreements, you should speak with a lawyer. If you have a low income, you may qualify for free legal services. Whether you have a low income or not, you can use the Guide to Legal Help to find lawyers in your area. If you are not able to get free legal services but can’t afford high legal fees, consider hiring a lawyer for part of your case instead of the whole thing. This is called limited scope representation. To learn more, read Limited Scope Representation (LSR): A More Affordable Way to Hire a Lawyer . To find a limited scope lawyer, follow this link to the State Bar of Michigan lawyer directory . This link lists lawyers who offer limited scope representation. You can narrow the results to lawyers in your area by typing in your county, city, or zip code at the top of the page. You can also narrow the results by topic by entering the kind of lawyer you need (divorce, estate, etc.) at the top of the page.

Michigan Land Contract Laws

Jan 18, 2020 | Real Estate Law

Land Contract

A land contract is a written legal contract or an agreement, and it’s used to purchase real estate, such as a house, an apartment building, a commercial building, or even vacant land, so long as it deals with real property. Buying or selling on a “land contract” in Michigan is a transaction involving seller financing. It’s similar to a mortgage, but rather than borrowing money from a lender or a bank to buy real estate, the buyer makes the payments to the real estate owner or the seller until the purchase price that was agreed upon between the parties is paid in full. A buyer and seller both signed the land contract and that land contract covers certain provisions in the terms and conditions of the sale and when those terms are satisfied and all the conditions are met, including payment of the purchase price over a certain period, then the legal title of the property transfers from the seller to the buyer by way of a deed.

Warranty Deed or Quitclaim Deed

It can be a warranty deed or it can be a quitclaim deed, whatever the parties negotiate.

Land Contract vs. Mortgage

Why are land contracts used when mortgages are so freely available? Well, land contracts are a form of seller financing and as stated, you know, there’s certain advantages to both buyer and seller. With a buyer, the buyer may not have the greatest credit or they may have some income issues or some other reasons that prevent them from being able to obtain a mortgage from a traditional bank or mortgage lender. Therefore, the parties can enter into a sale-by land contract so that the buyer makes monthly payments directly to the seller. Regarding the seller, the land contract benefits them because it can create a monthly income stream. If there is no underlying mortgage or encumbrance, the seller is going to be getting cash on a regular monthly payment.

Buyer at Slight Disadvantage

The seller can also get a higher purchase price, usually from a buyer, because the buyer is at a slight disadvantage. The seller can ask for a higher purchase price. The seller may also require a larger cash down payment that can be used to generate income. Having a land contract is an appropriate document to use when the parties to a real estate transaction deal in seller financing. There are a few things that I like to look for to make things easier for both buyers and sellers on a land contract. Let me just share with you, these five, but there are more.

Amortization Schedule

You know, the parties need to make sure that they have an amortization schedule attached to the land contract. This way, both parties know where the payments stand in any given month regarding payments. It’s been my experience that when people are buying on a land contract, more often than not, they’re newer to financing concepts such as the declining balance method and therefore, having an amortization schedule clearly shows how installment payments are allocated throughout the Michigan land contract relationship.

Tax and Insurance Escrows

The next provision that should be looked at is tax and insurance escrows—I discourage sellers from collecting escrow payments for taxes or hazard insurance regarding a land contract. Instead, sellers should make it the responsibility of the buyer to confirm their property taxes and insurance are paid regularly. A buyer’s failure to pay taxes or insurance can be used as a separate non-monetary default to maintain a land contract forfeiture action.

Exempt Seller Under Dodd Frank

There’s one caveat, and it can be argued that under federal law, called Dodd Frank, that the act does not speak to escrow accounts and land contract agreements. So if you’re not an exempt seller under Dodd Frank, that means if you’re not selling your primary residence, then there is a presumption that the land contract terms are predatory. So you should really speak with a real estate attorney — a competent real estate attorney, when it involves Dodd Frank and when it involves a real estate investment property that you’re selling on a land contract.

Prepayment Penalties

Michigan courts are clear against prepayment penalties that exceed one % of the land contract balance for anything over three years. So within three years, the first three years, the Michigan Consumer Protection Act allows parties to collect a prepayment penalty; after that, the buyer could sue the seller for predatory lending. So be very careful there. See an attorney.

Due-on-sale clauses create a concern for sellers who have an underlying mortgage on their property. Briefly, bank and mortgage provisions generally preclude a seller from conveying their interest in secured or pledged property without first paying off the mortgage; thus, the mortgage balance is said to be due on sale once the mortgagor conveys title to a third party. So whether a seller selling a property on a land contract actually triggers due-on-sale provisions is debatable, since the land contract purchaser does not obtain title until they pay off the contract.

Therefore, memorandums of a land contract are recorded in the county to put the world on notice of a transaction. Still, it’s not a deed and that is the actual conveyance instrument. So the due-on-sale clause may not even be invoked. Be advised that if you’re a real estate investor and you represent to a mortgage bank that you intend to use the property as a primary residence, and then shortly thereafter you sell it on a land contract for investment purposes, then the lender can call the mortgage for misrepresentation, so be very careful. You should consider speaking with an attorney before you sell an investment property on a land contract.

Legal Remedies

Failure to specifically provide for legal remedies available to a seller in the event of a buyer default can make collection and eviction under a land contract a nightmare. In Michigan, the normal default process involves a forfeiture on the land contract. Land contract forfeiture actions do not allow the seller to collect on monetary deficiencies, such as selling the home for less than what was owed by the buyer under contract. So if a seller is seeking more damages over and above just the payments that were in arrears, then they need to have a provision within the contract that calls for a foreclosure remedy. Notice provisions also need to be followed, otherwise declaring a contract default before the time allows can prove costly and it’s a waste of legal efforts. So unlike federal agency mortgages, which are nationally standardized documents, land contracts more often than not are drafted to meet the specific needs of the parties that are purchasing the property or in the purchase transaction.

Land contracts are legal agreements with far-reaching legal implications and they should be drafted and reviewed by a licensed real estate attorney. I hope you got a lot of information in this very brief period.

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Buying or Selling Real Estate with a Land Contract

Buying or selling a home, commercial property, vacant land and other types of real estate with a land contract is popular in Michigan. Usually, there are no banks, lenders or mortgages involved in a land contract transaction. A land contract is primarily used when the buyer of real estate cannot obtain conventional financing to pay the entire purchase price at once. However, families also use a land contract to sell a family house, cottage or other property to children, siblings or other relatives. A land contract is also used when a seller does not want or need the entire purchase price at once and chooses to receive a steady income with payments on the land contract over time.

Although there are benefits of using a land contract, there are also risks involved that both a seller and buyer must consider. Contact attorney Bill Ager for a free consultation to learn about using a land contract in a real estate transaction. He will walk you through the entire process for a reasonable flat fee. The following are the basics of how a land contract transaction works in Michigan and important considerations when using a land contract.

What Is a Land Contract?

A land contract is a legal document between a buyer and seller for real property. Land contracts are legal in Michigan and are enforced like any other contract. To be enforceable, the contract must be in writing.

Land contracts are similar to a mortgage or a loan for property, but rather than borrowing money from a lender or bank, the buyer of the property typically makes monthly payments to the seller until the purchase price is paid in full. Prior to paying off the purchase price, the buyer has “equitable title” to the property with the right to possess and occupy the property as well as control over the property, subject to the provisions of the land contract. After the purchase price is paid, the buyer receives “legal title” to the property with a deed that is recorded with the county register of deeds. Typically, the buyer is responsible for payment of all property taxes, obtaining insurance coverage on the property and for all maintenance and repairs to the property for the term of the land contract.

Land contracts are also more flexible than traditional financing. The buyer’s credit history is evaluated by the seller, not a bank or lender. The parties are also able to negotiate the down payment, length of the land contract, monthly payments, interest rate and whether there will be a balloon payment at the end of purchase period of the land contract.

Considerations for a Buyer and Seller using a Land Contract

When using a land contract, there are several considerations for both the buyer and seller. Because the buyer is seeking financing outside of a traditional bank, the seller may set their own requirements for the buyer’s creditworthiness instead of having a bank do it. This usually makes it a lot easier to sell the property. However, in most cases prior to signing the land contract, the parties should enter into a sales agreement that specifies the primary terms of a land contract and makes the purchase of the property contingent upon a buyer’s inspection of the property and the issuance of an owner’s title insurance policy to the buyer for the amount of the sale price.

Buyers and Sellers should also be very cautious of using standardized forms for land contracts because every land contract can be different. This means you need to be very careful when negotiating a land contract and ensure that the terms of the agreement do not put you at a disadvantage. Land contracts often offer fewer protections, especially for buyers, than a mortgage does. Although either party may bring a court action to enforce a land contract, if the buyer does not fulfill their payment obligations, a seller can regain possession of the property and either keep whatever money the buyer has paid or ask for the remaining balance on the contract.

Buyer Considerations

If you are considering using a land contract to buy real estate, ask yourself:

• What can you afford as a down payment?
• How much can you afford in monthly payments and interest on the unpaid principal?
• If you include a balloon payment, how will you pay for it?
• What legal remedies does the seller have if you default?
• If the seller has an underlying mortgage on the property, what legal issues can arise between the seller and the seller’s lender?
• Will an owner’s title insurance policy be issued that is acceptable?
• Is a sales contract used for the land contract purchase that makes the purchase contingent on inspecting the property and obtaining an acceptable owner’s title Insurance policy?
• Will a deed for the property be held in escrow for release to you for recording after pay off of the land contract?
• Is a sales contract being used for the land contract purchase?
• If you are purchasing residential property, have you reviewed the seller’s Seller’s Disclosure Statemen t and Lead Based Paint Disclosure ?

Seller Considerations

If you are planning to sell real estate using a land contract, consider:

• How much of a financial return do you need, and what terms will generate that financial return?
• How will you assess the buyer’s creditworthiness and their ability to follow through on the purchase?
• How will you enforce the terms of the contract?
• If you have a mortgage, will selling under a land contract impact your agreement with the lender?
• How will the property be insured from loss or damage?
• Does the land contract contain provisions limiting the type changes the buyer can make to the property.
• Is a sales contract being used for the land contract sale?
• If you are selling residential property, have you provided the buyer with a Seller’s Disclosure Statement in accordance with Michigan Law and a Lead Based Paint Disclosure in accordance with federal law?

Contact Bill Ager for a Free Consultation About Your Land Contract Transaction

A land contract is an attractive alternative to a traditional mortgage that can facilitate the purchase or sale of real estate. However, using a land contract comes with unique risks and legal considerations. If you are considering purchasing or selling real estate using a land contract, contact Michigan real estate attorney Bill Ager for a free consultation . Bill is committed to offering legal services for a reasonable flat fee. To speak with Bill about your real estate transaction, call (734) 649-0784, email [email protected] , or use our online contact form.

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