Real estate Unit 19

Define a land contract.

A contract in which the seller finances the sale of real estate in installment payments from the buyer rather than financing through a third party lender.

Tips for Buyers

Although the seller is not required to obtain an appraisal for a land contract, the buyer is advised to get one. The buyer should research the seller's title and obtain title insurance to assure the title is not encumbered by mortgages, judgment liens, or other interests perfected prior to the execution of the contract. It is also a good idea for the buyer to engage the services of a holding company to retain possession of an executed deed and the original documents. The buyer should have the contract recorded immediately to protect the buyer's interest in the property. The buyer should also consult with a real estate attorney.

Disadvantages to buyer

If contract contains forfeiture clause, buyer can lose property upon default Courts look negatively on forfeiture clauses If seller's existing mortgage does not get paid off, transfer of title may not happen Seller can burden property with liens or sell oil rights, etc.

Define amortization.

This is the length of time a land contract will run. It depends on the size of the contract, monthly payment, and interest rate being charged.

What important clause should be included in a land contract to help protect the seller if the buyer defaults?

Time-is-of-essence clause

Why should a buyer research the seller's property title before entering into a land contract?

To be sure there are no judgment liens, mortgages, or other interests on the title prior to the signing of the land contract

What are the two situations where forfeiture is appropriate in Indiana?

When the buyer abandons or absconds When the buyer has paid a minimum amount on the contract at time of default and attempts to retain possession while the seller pays taxes, insurance, and other upkeep

In which type of land contract does the buyer make payment to the seller who then pays an underlying lender's payment?

Wrap-around contract

Disadvantages to seller

Buyer may be poor credit risk Greater chance of buyer default Buyer could sell interest in property to third party unless stipulated in contract

In which type of land contract does Indiana have no provisions in the Codes?

Power of sale

How land contracts work

Buyer and seller enter into contract based on agreed upon purchase price Both parties negotiate payment options and interest Buyer moves onto property Interest of both parties determined by equitable conversion Buyer holds equitable title from date contract signed Liens can be imposed on seller's interest in property Contract should require marketable title at completion of payments Seller transfers legal title to buyer upon completion of payments Amortization is the length of time the contract runs; depends on size of contract, payments, and interest rate

With so many advantages for the seller, what is the main disadvantage?

Buyer may have poor or no credit history which increases risk of buyer default.

Some title companies draft and insure land contracts that contain a seller, buyer, and a trustee. Like a trustor in a trust deed, the seller and buyer assign right, title, and interest to the trustee for the purpose of securing the seller and buyer's obligations. If the buyer stops making payments, the trustee has the power to foreclose under the power of sale. The process of filing a notice of default varies from state to state.

However, there is no power of sale provision in the Indiana Code. There is, however, language which requires that, for any action to be taken in any contract for the sale of land, the contract, promise, or agreement must be in writing and signed by the party against whom the action is being brought or by the party's authorized agent.

How can a forfeiture clause affect the buyer in a land contract?

If the land contract contains a forfeiture clause and the buyer defaults on payments, the seller can end the contract, take possession of the property, and keep the payments made by the buyer.

Benefits to buyer

Payment terms Freedom to negotiate Immediate possession of property upon signing of contract

Land contract

Seller finances property for buyer Buyer entitled to move into property when contract signed Buyer does not obtain title until all payments made

Briefly explain how a land contract works.

The seller and buyer negotiate the contract, based on an agreed purchase price which the buyer will pay over an expressed amount of time. The buyer then has the right to possess the property and is the owner for tax purposes. Once the agreed purchase price has been paid, the seller transfers the title to the buyer.

There are no statutory limits on the seller's right to forfeiture, but Indiana courts will enforce forfeiture only under circumstances in which it is found to be consonant with notions of fairness and justice under the law. There are two situations in which a forfeiture is appropriate in Indiana:

where there is an abandoning, absconding vendee where the vendee has paid a minimal amount on the contract at the time of default and seeks to retain possession while the seller is paying taxes, insurance, and other upkeep in order to preserve the premises

More common remedies allow the seller to terminate the land contract upon the buyer's default. The seller must give the buyer a notice of intent to terminate the contract and request that buyer return possession of the premises. Once the buyer returns possession, the seller may need to file a quiet title action to remove the buyer's interest as a cloud on the title of the legal owner. However, a seller can bring an action to quiet title only if the seller has possession of the property. If possession is not voluntarily relinquished, the seller may also file an action for ejectment.

A seller may also declare forfeiture based on the terms of the land contract. Historically, a forfeiture clause would allow installment sellers to forfeit the contract without notice, regain possession, and keep all money previously paid by the installment buyer. Even if the buyer had substantial equity in the property, it could be lost for even the smallest breach of the land contract. Recognizing the unfairness of forfeiture clauses, judges and legislators have enacted certain protections for installment buyers.

Another advantage to the sale for the seller is that he does not receive a large sum of money at one time, for which he may be taxed. Especially in large pieces of ground the amount can be quite substantial, and the seller may wish to spread the payment over 5-10 years in order to reduce the tax burden. Also, the closing is typically faster and typically does not require an appraisal.

Additionally, under a land contract when a buyer defaults, a seller may not always be bound by mortgage foreclosure laws but instead can recover possession more quickly and at less expense. Lastly, the seller keeps legal title to the property until the buyer pays the final installment.

Indiana does not define how to determine if there is a "minimal amount" paid on a contract, which would preclude the seller from exercising the right of forfeiture. Whether a particular sum paid toward a particular contract price is minimal depends upon the totality of the circumstances surrounding the contract and its performance. There is no set percentage of the contract price to be paid that precludes forfeiture. Where forfeiture is inappropriate the seller may foreclose.

Although Indiana courts typically require foreclosure, rather than forfeiture, as a means of protecting a buyer who has substantial equity in the property, the reality is that the buyer may not have substantial equity in the property when he/she defaults. Thus, the seller is in a better position to regain possession of the property. Keep in mind, the intent of land contracts was that they provided an alternative to third-party lending, which freed sellers from the complexities of traditional mortgage foreclosure. However, as courts and legislators have limited sellers' rights to forfeiture, the line between land contracts and mortgages is being erased, and this simple alternative to traditional mortgage financing may no longer be so simple.

Tips for Sellers

As mentioned above, sellers should always pull the buyer's credit report to determine if the buyer has filed bankruptcy or made late payments to other creditors, which should raise a red flag. The seller should require a title insurance policy because title searches of public records will show liens or judgments again the buyer. The seller should require the buyer to obtain a homeowner insurance policy so the seller is not responsible for the home after the land contract has been signed. Both the seller and the buyer should be named on the policy. It is also advised that the seller hire a disbursement company to handle contract collection. The seller can ask the buyer to pay the property taxes directly to the seller or to the disbursement company so the seller can be sure the tax payments are paid on time. The seller should consider including an acceleration clause in the contract which would allow the seller to force the buyer to refinance the property if the condition of the property becomes a risk to the seller's financial investment. The seller should also include a clause in the contract which prevents the buyer from assigning the contract so the seller can be sure with whom he/she has a contract. As recommended for buyers, sellers too should always consult with a real estate attorney.

While the land contract is a security device, it lacks many of the formalities and buyer protections included in mortgage laws. The majority of land contracts include a forfeiture clause, which allows a seller, upon buyer's default, to end the contract, regain possession of the property, and keep all payments made by buyer.

Compared to mortgage foreclosure, the seller can recover the property more quickly because he or she is not required to sell the property, observe notice and redemption rights, or file a court case. However, for a court to enforce forfeiture of a land contract, the right of forfeiture must be expressly provided for in the contract.

Seller remedies against defaulting buyer

Contract should include time-is-of-essence clause Seller should not accept late payments from buyer Land contracts usually equal to mortgages in eyes of Indiana courts, so foreclosure rather than forfeiture is required when buyer has substantial equity in property Seller can enforce the contract or declare it at an end if buyer defaults Seller must give defaulted buyer notice of intent to terminate Seller may need to file quiet title to remove buyer's interest in property Seller may need t file action for ejectment if buyer does not relinquish property voluntarily Indiana recognizes only 2 situations for forfeiture:Buyer abandons propertyBuyer has paid only minimal amount on contract and attempts to retain possession while seller pays taxes, insurance, and upkeep Seller's rights limited by courts and legislators

Why is it easier for a seller to terminate a land contract and recover possession of the property if the buyer defaults.

Courts generally do not view land contracts the same as mortgages and so they are not subject to mortgage laws.

SAFE ACT

Created in response to mortgage fraud Nationwide mortgage licensing system and registry for mortgage industry Parties who extend financing for purchase of real estate need license Requires FBI background check, 20-hours course completion, examination, unique identifier for national database Exceptions include selling of own home, commercial building, or financing for immediate relative.

Explain equitable conversion.

Equitable conversion is treating land as personal property under certain circumstances. It gives the buyer a real property interest from the date the land contract is signed.

Another disadvantage for the buyer can be found when the seller has an existing mortgage on the property that the buyer is purchasing by land contract. If the seller does not pay off the existing mortgages before the time the buyer pays off the entire purchase price outlined in the land contract, the transfer of the deed can become an issue as there still is a claim to the deed from the seller's original mortgage. The buyer should determine in advance whether or not any mortgages exist on the property being purchased, and then require by contract that the seller pay off all mortgages prior to the final payment being made on the contract, with penalties should the seller fail to do so. However, the buyer should be advised that if the seller does not adhere to such stipulations, the buyer may be required to pay off the mortgages that encumbers the property before the deed can be transferred.

Further, because the buyer does not get complete title until the final payment is paid, the seller is free to burden the property with a number of items until that time. A buyer may find that the property has been burdened with a mechanic's lien or that the oil rights have been sold while the purchaser had possession of the property but not complete title.

The forfeiture provisions give the buyer no right of redemption and allow a buyer to lose all interest in the property for even the slightest breach. Because of the possibility of inequitable results, courts generally look negatively upon forfeiture clauses, and they will be strictly and narrowly construed.

If the buyer misses any payment under a land contract, he or she may lose claim to ownership of the property (the right to have the deed transferred to him) and the seller may keep the money paid up to that point as "rent." Thereafter, the seller would NOT be required to transfer the deed to the buyer. Note, however, that Indiana has reformed its laws to remedy the situation where a buyer defaults after completing many payments. If the buyer's equity in the property at the time of default is "significant," as defined by the law, the seller must institute formal foreclosure procedures and must compensate the buyer for accumulated equity before repossessing the property.

Land contracts are common throughout the United States. In some states, they are called

Installment Contracts, Trust Deeds, Contract for Deed, Deeds of Trust, Home Notes, or Privately Held Mortgages. Regardless of the name used, they all represent the same thing: a way of selling property where the buyer "borrows" from or relies upon the seller for the financing, rather than paying cash up front or borrowing from a bank. This contract is a bilateral contract, with both parties performing, but the time frame is different than a regular sales contract. Under Indiana law, the parties have broad freedom to negotiate the terms of a land contract. However, using the services of an attorney will assure that all the needs of both buyer and seller are met.

Often times, home buyers are in a financial position to afford the monthly payments associated with home ownership, but they lack the down payment necessary to qualify for financing. Sometimes a buyer's credit score may prevent him or her from obtaining traditional bank financing altogether. In either case, it often makes sense for the buyer to consider purchasing a home or piece of real estate through a

Land Contract and have the owner/seller provide the financing for that purchase.

Tips for buyers

Obtain appraisal Research title and obtain title insurance Use holding company for executed deed and original documents Record contract immediately Consult with attorney

Equitable conversion gives the contract buyer a real property interest from the date the contract is signed. The buyer under a real estate land contract is the owner for real estate tax purposes.

Over the duration of the contract, liens may attach to the equitable title of the buyer and the buyer may assign his or her equitable interest to a lending institution as security for a loan.

Under Indiana contract law, the parties have broad freedom to negotiate terms, so the buyer is in a legal position to obtain contract terms that are beneficial to him/herself.

Payment terms under a land contract are typically more flexible than with third-party financing, although they are not required to be. The seller may agree not to demand a down payment, for example, in exchange for a higher purchase price.

Tips for sellers

Pull buyer's credit report Require title insurance Require buyer to get homeowner insurance policy Hire disbursement company to collect payments Ask buyer to pay taxes directly to disbursement company Include acceleration clause Include clause to forbid assignment Consult with attorney

Name four advantages of a land contract to the seller.

Quicker and less expensive than complying with bank financing Flexibility in negotiations No large sum of money to be taxed on Interest goes directly to seller Easier to repossess property if buyer defaults Seller keeps legal title until final payment

Benefits to seller

Quicker and less expensive than using third party lender Flexibility in terms negotiations No large sum of money to be taxed on all at once If buyer defaults, seller not bound by mortgage foreclosure laws; can recover possession more quickly and less expensively Seller retains legal title until buyer makes final payment

In response to mortgage fraud, Congress passed the

Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act) to establish a nation-wide mortgage licensing system and registry for the residential mortgage industry. The SAFE Act requires all 50 states to set minimum standards for mortgage loan originators and licensure.

Also over the duration of the contract, liens may be imposed upon the seller's interest in the property. For the buyer's protection, the land contract should require the seller to convey marketable title at the completion of the contract. To ensure completion of the contract upon the death of the seller, the deed should be held in escrow for the duration of the contract. Unless there is a fixed time for delivery of a deed in the contract, the seller does not have to provide merchantable title to a buyer until the last payment is made.

Some states recognize the doctrine of equitable conversion, except where the contract stipulates that no interest shall pass until the contract is satisfied. However, Indiana still holds that the buyer has equitable title upon execution of the contract, even if there is such a provision in the contract.

In which type of land contract does the buyer save money on monthly payments because the buyer is not paying a higher interest on the balance owed on an existing, underlying loan?

Straight land contract

Explain the SAFE Act.

The SAFE Act establishes a nationwide mortgage licensing system and registry to protect against mortgage fraud. It requires individuals who extend financing for the purchase of property, including sellers under land contracts, to be licensed. The exceptions are selling an individual's own home, a commercial building, or selling and financing for an immediate relative.

The buyer does not usually need to qualify for a loan although the seller can ask for a copy of the buyer's credit report. The length of the land contract term, the interest rate, and monthly payments are all negotiable. There is typically low closing costs and no lender fees. The closing can be completed more quickly.

The buyer is typically entitled to possession of the property as soon as he signs the contract, as soon as he tenders a down payment or as soon as he pays the first periodic installment. Thereafter, the seller has no more right to enter the property than a landlord has to enter rented property. Nevertheless, since general contract law rather than landlord-tenant law applies, the parties have greater freedom to negotiate the terms of their arrangement. The buyer is entitled to quiet enjoyment and use of the property to the exclusion of anyone else who may want to reside on the property.

The seller and buyer enter into a contract that normally states that the seller shall transfer ownership of the property to the buyer after he or she has fully paid the seller the agreed upon purchase price. Because the buyer and seller privately negotiate and reach their own sales terms, the contract can reflect any arrangement comfortable between the parties: the contract can call for smaller monthly payments, a varying payment or interest rate as outlined in the contract, or a balloon payment or lump sum payment to pay the balance of the purchase price for the property.

The interests of a seller and a buyer under a land contract are determined by the doctrine of equitable conversion. Equitable conversion is the treating of land as personalty and personalty as land under certain circumstances. The buyer holds equitable title once the contract is executed. The seller holds the legal title in trust for the buyer, and the buyer holds the purchase money in trust for the seller. Once the contract is satisfied, the seller gives the buyer a deed, which vests legal title in the buyer from the date the contract was signed.

The SAFE Act requires states to pass legislation requiring licensing for real estate loan originators. Indiana's SAFE act went into effect in June 2010. It requires parties who extend financing for the purchase of real estate, including sellers under land contracts, to be licensed.

The licensing process requires the seller submitting to an FBI background check, completing a 20-hour education course, passing the associated examination, and obtaining a unique identifier for a national database of mortgage loan originators. SAFE licensing requirements do contain exceptions--for example, they do not apply if an individual is selling his/her own home, a commercial building, or to an immediate relative.

Why should the seller require the buyer to get homeowner's insurance and whose name(s) should be on the policy?

The seller does not want to be responsible for the property after the land contract is signed. Both seller and buyer should have their names listed on the policy.

Because the seller is financing the purchase, the buyer doesn't have to qualify for a loan in order to enter into the transaction. This allows the seller to attract buyers who would otherwise be unable to purchase the property. However, dealing with a buyer with a poor credit history, or no credit history at all, is likely to increase the risk of buyer default.

The seller has to count on the buyer being able to complete the sale at the time agreed upon. Unless the seller specifically requires that no assignment can be made, the buyer could sell his interest in the property to another without the seller's consent.

There is no override of interest in a straight contract. The buyer can agree to pay the existing lender directly and make another payment to the seller, or the buyer can send one payment to the seller who will disburse payment to the underlying lender. For example, using the same scenario as above, the sale price is $100,000. The buyer pays $10,000 down and makes one payment of $268 on the existing loan balance of $50,000, bearing interest at 5%. The buyer then makes a second (monthly) payment of $253 to the seller on $40,000 owner-carried financing, bearing interest at 6.5%.

The total of both of those payments is $521, which saves the buyer $46 a month over the wrap-around contract. The difference being that the buyer is paying 5%, not 6.5%, interest on the existing $50,000 loan.

Wrap-Around Land Contracts

These contracts include an existing mortgage. The way they work is that the buyer makes a payment to the seller who then pays the underlying lender's payment. If the payment received from the buyer is higher than the seller's payment to the lender, then the seller keeps the difference between the payments. Furthermore, if the existing mortgage has a lower interest rate than the rate on the land contract, the seller also earns the extra interest money.

Selling a home by way of a land contract can prove beneficial to the real estate owner in a number of ways. Selling property through a land contract can provide a quicker and less expensive way for the property owner to sell the property: the seller does not need to comply with the often rigid and tedious guidelines of bank financing or the delays that often accompany those guidelines or pay the fees associated with loan closing costs.

Third-party lenders demand extensive documentation, and their involvement in a real estate sales transaction inevitably results in significant delays. If the seller is in a hurry to complete a real estate transaction, a land contract can greatly expedite matters. The lack of a third party to the transaction allows the seller considerable flexibility in negotiating terms with the buyer. The seller may, for example, refrain from demanding a down payment from a buyer with few financial resources. In exchange, the seller might demand a higher purchase price, or a large "balloon payment" as the final installment. In addition, since there is no third-party lender, interest paid by the buyer goes directly to the seller who is free to negotiate interest rates with the buyer.

What does an acceleration clause do?

This clause allows the seller to force the buyer to refinance the property if the condition of the property becomes a risk to the seller's financial investment.

When drafting the land contract, a seller should include a time-is-of-essence clause. To prevent waiver of the clause, the seller should not accept late payments from the buyer. If the buyer does default on payments, the seller must take legal action under procedures mandated by state law.\ Upon a buyer's default, a seller has available both statutory and common law remedies. Despite the similarities, courts generally do not view land contracts as functionally equivalent to mortgages, and thus, land contracts are usually not subject to mortgage laws. Therefore, it is generally easier for a seller to terminate a land contract and recover possession of the property. However, an Indiana appellate decision has made land contracts in Indiana more like notes and mortgages, which require foreclosure action and a foreclosure sale. Foreclosures are slow and expensive.

When a buyer defaults upon a land contract, a seller may elect to enforce the contract or to declare the contract at an end. The seller can seek to enforce a contract in an action for specific performance or an action to recover the unpaid purchase price. However, such actions may not be helpful unless the defaulting buyers have the money necessary to complete the contract. The seller may also seek rescission of the land contract, where the seller returns the payments made by buyer in exchange for the property and the fair rental value while the buyer was in possession. Rescission attempts to return the parties to the positions they were in prior to execution of the contract.

For example, let's say the land contract is for $100,000 and the buyer pays $10,000 down and agrees to make monthly payments of $567 on the remaining $90,000, bearing interest at 6.5%. Then let's say the existing underlying loan is $50,000, bearing a 5% interest rate, with monthly payments of $268.

When the seller collects the payments from the buyer, the seller is earning the 1.5% difference in interest between what he/she is paying and what he/she is collecting. The seller is also earning the $299 difference in his/her payment on the existing loan and the payment he/she is receiving from the buyer. It doesn't' stop there. The seller is also earning 6.5% interest on the $40,000 difference between what the seller owes on the existing loan and what the buyer is paying for the property.

In which type of land contract does the seller earn interest on the difference between what the seller owes on an existing loan and what the buyer is paying for the property?

Wrap-around contract

Types of land contracts

Wrap-around contracts - when there is an existing mortgage Straight contracts - no override of interest Power of sale - right, title, and interest is assigned to trustee to secure the seller and buyer obligations; no provisions in Indiana Code

How long a land contract is scheduled to run is referred to as the contract's amortization. A contract's amortization depends on the size of the contract, the size of the monthly payment, and the interest rate being charged. (The higher the interest rate and/or the smaller the monthly payment, the longer the straight amortization will be. This is why

a balloon payment is sometimes considered. Contracts with a 10- to 20-year amortization are common and are preferred to contracts with a 30-year amortization. Balloons usually are set for 5 or 10 years from the date the contract begins. Whatever the terms agreed upon for transferring ownership, when the agreed upon transfer date is reached, the seller tenders (or gives) a deed to the property to the buyer who then records the deed in the county recorder's office or the real property office of the county where the property is located.

A land contract is a

contract in which the seller finances the sale of real estate in periodic installments, rather than financing through a third party such as a bank. The buyer is typically entitled to move into the property as soon as the contract is signed but does not obtain title to the property until he completes payments.