What Is a Land Contract?
A ‘land contract’ in Michigan is sometimes called a contract for deed, land sale contract, installment land contract, or deed of trust with power of sale. In fact, contracts for deed are used more frequently in Michigan. However, in Michigan you are asked if you want to execute a land contract. If you say yes, the attorney will call it a land contract.
A land contract is a legal agreement between a seller of real estate and the buyer of the real estate that sets specific terms – and requires that the buyer make monthly payments (or quarterly payments, etc.) in exchange for the title of the real estate once all conditions of the agreement are met.
Most land contracts require that the buyer pay the seller monthly installments for a specified period of time, usually two-to-three years. In some instances, that period can be as short as about six months. As with a mortgage , the buyer makes equal monthly payments to the seller until the total debt is paid off. So in essence, the seller is holding a first mortgage on the property.
A land contract can outline different payment arrangements to accomplish the same thing as a conventional mortgage. With a mortgage, the buyer usually pays off the loan over a 30-year period. However, with a land contract, the buyer might pay off the debt over 3-5 years. Therefore, the land contract either is for the full amount of the purchase price (like a mortgage) or it’s for a partial amount of the purchase price (like an unsecured seller’s loan). The buyer will often pay a higher interest rate on the land contract as well.
The monthly payment is typically higher that on a mortgage because the term is much shorter.
A land contract is often used when buyers cannot obtain a mortgage, due to a credit issue, or when the property does not meet the lender’s requirements.
Land Contracts: Required Recordings
There are several legal requirements for the recording of contracts, which differ from state to state and even within states, depending on the local municipality in which the land is located. Furthermore, if a contract is not recorded in accordance with applicable law, it may or may not be void or voidable.
In Connecticut, General Statutes Section 47-10 provides that records in the town clerk’s office regarding real estate, whether such records are labeled "deeds" or "land records" or "land records conveyances" are equally admissible in court (thus, a document labeled "land records conveyance" would not be considered the same as a deed, but rather as a land recording for a conveyance of real property, which would then need to be indexed as a deed). The section does not explicitly state whether a land conveyance that is not recorded, but simply filed in the land records would either be admissible or invalid. Indeed, Connecticut law does not require that a land contract be recorded in the town clerk’s office in order to be valid. See Crowther v. Risley, 119 Conn. 33, 174 A., 423 (1934) (stating that a land contract is not a deed or mortgage and therefore was not required to be recorded in the Town Clerk’s office). Nevertheless, there are several consequences for failing to record (or correctly record) a land contract.
For example, under General Statutes Section 47-10, a land contract that is subsequently assigned (i.e., sold) must be recorded in order to give priority to the purchaser; that section limits a first mortgage’s privilege to the priority provided in title 42, and states that it is not limited to privileged debts or to mortgages regardless of priority. In other words, a land contract that is subsequently assigned must be recorded in order to avoid the assignment being treated as a second mortgage or some other priority creditor, and risk similar consequences as an unsecured debt such as a credit card or business loan.
However, the possible implications would differ at the municipal level. A gap in time is difficult enough without the risk that the unrecorded land contract will be deemed to be a second mortgage, especially since most parties would not even think to have the contract recorded if it is labeled "land records conveyance" rather than a deed.
Pros and Cons of Recording a Land Contract
The value for protecting both the seller and lender from adverse claims is significant. In some states, if the buyer of a parcel of real property on which a land contract is situated does not record the instrument within 30 days, a second purchaser of the property from the buyer may take the property free of the land contract. A second purchaser can do so even if he had actual notice of the land contract. For example, if the terms of a land contract have been agreed upon and signed by the purchaser but are not recorded before the purchaser sells the real property to a third party, then such a third party will acquire the real property free of the land contract. Recording also provides the benefit of protection from fraudulent or improvident claims. The public recording system is only available in the U.S. and Canada, and is a "compilation of information."
But there are also disadvantages to recording as well, both for the seller and the buyer. For example, the bringing of a court claim to enforce a land contract is generally subject to a statute of limitations that runs from the date of the breach. If either party records the land contract, the recorded instrument is public evidence of the contract and its terms, and this might make it easier for a wrongdoer to find out how much is owed under the contract, making it easier for that person to commit fraud. In some states, upon the filing of a land contract, the seller loses the right to take the Real Property back except under foreclosure proceedings. If the land contract gives the buyer an option to purchase the Real Property at any time before the contract term expires, the seller might lose important leverage in negotiating either for payment due under the contract or for the return of the Real Property.
Another disadvantage of recording a land contract is that it provides a public record of the terms of the contract, including any default by the buyer. Such a public record might be a disincentive to future buyers who are considering contracting with that seller. Furthermore, the seller might incur extra recording fees and possibly additional tax liability.
Implications of Not Recording a Land Contract
When valuable real estate is involved, not recording a land contract can have significant legal and financial consequences. One of the most obvious dangers is that titles can be disputed, even though they are registered with the county. While the seller is still the recorded owner, he is no longer the true owner once he sells the property through a land contract. The buyer is the actual owner at that point. If the buyer pays the agreed price and the seller still retains title, he continues to enjoy the rights of ownership.
In this scenario, it is very easy for the seller to keep the land contract secret and make a claim on the title. If the land contract is not properly recorded , the buyer may have a difficult time proving the contract in a court of law. Real property records are generally legally sufficient to establish evidence of valuable ownership unless competitors can prove otherwise.
If a deal between a buyer and a seller goes awry, land contracts become quite complicated. For instance, should the seller intend to go back on the agreement and reclaim ownership of the property, the buyer will be forced to defend his legal rights in a dispute. However, if a land contract is properly recorded, the buyer can reclaim his rights without issue.
How to Properly Record a Land Contract
To properly record a land contract, there are a number of typical steps that you will need to follow, including: 1.Preparing the necessary documents – The primary document needed will be the land contract itself. This document is typically a two-party contract between the buyer and seller that details the agreement for the sale of the property. 2.Obtaining any necessary signatures – Both parties to the land contract will need to sign the document in the presence of a notary public, or have it witnessed by two individuals who are not parties to the contract. In some state, three witnesses may be required. 3.Getting mortgage or lien disclosure – If the property being sold is subject to a mortgage or lien, the payoff amount must be included in the contract with a disclosure to the buyer if this amount has not been satisfied to the extent of the purchase price. 4.Paying the recording fees – Costs will vary by county and locality for providing this service. 5.Filing the land contract with the appropriate government offices – Check with your county or city assessor’s office to confirm where the land contract should be submitted for recording.
Real Estate Lawyer Tips
It is prudent to consult an experienced real estate attorney before deciding whether to record a land contract, because the decision whether to record is often a judgment call, with no clear right or wrong answer. An experienced attorney will be able to counsel you on the legal requirements applicable to your real estate transaction under state law and on the practical implications of the decision to record or not to record under local circumstances – including the effect that the retention or lack of record of the land contract could have on parties other than the buyer and seller under the land contract and the possible impact of recording on the buyer’s financing or the seller’s ability to sell the property to a third party .
Because the legal and practical implications of the decision to record nine+ months later that the land contract has been signed may become very important, the decision not to record at the time the land contract is signed could result in costly litigation.