Intro to Michigan Land Contracts
A land contract is a lawful agreement between a buyer and seller where, as a result of its execution, the deed of the property is retained in the seller’s hands until the purchase price is paid in full. It is alternative way to hold title that is unique to Michigan State law.
In Michigan, a land contract is a transaction which effects a type of security title to real estate in which the seller/vendor retains legal title in the property until the completion of payments (with a fee for interest) on the contract. The buyer/ vendees are generally granted the right to take possession of the property and otherwise use and occupy it. Upon the payment of the full purchase price , the seller/vendor must return the deed to the property to the buyers/vendees.
Land contracts are a popular way in Michigan to purchase real estate because there are fewer barriers to entry, and the requirements are less restrictive than obtaining a traditional mortgage. For example, if you have poor credit, or no credit at all, it may be difficult to obtain a mortgage from a bank. However, a land contract seller may be more flexible with your payment schedule and more willing to work with you.
The Basics of a Michigan Land Contract
A land contract is essentially an installment agreement for the sale of real property. The seller (the "vendor") and the purchaser (the "vendee") enter into a purchase agreement, which sets the terms of the sale and lays out the specific terms of the sale. The vendee pays for the house over time, often at a higher interest rate than a conventional mortgage.
The purchase agreement will establish the purchase price. The agreement must also establish the interest rate on the sum to be paid. It can be a fixed interest rate over the period of the land contract, or it may be subject to a variable interest rate. Usually, the amount of the monthly payment will be determined in the purchase agreement. A land contract that is more than four years long and that does not include a balloon payment is required to have the payment be amortized at 7% interest over a 30-year period. If the monthly payment is too low, the person receiving the monthly payments could incur a tax liability.
In addition to the monthly payments, the land contract will likely require the payment of real estate taxes as part of the transaction. When a property is foreclosed upon, the eventual buyer will often seek recoupment of taxes in addition to the purchase price. Requiring the payment of these taxes now can help prevent this issue down the line.
Other important provisions of the land contract will include how the property is to be serviced by city or county utilities and how either party can have the utility services shut off. The land contract should also include an agreement about flood or open area rules.
What are the Pros/Cons for Buyers?
Buyers of property using a land contract often do so because of the flexibility that they provide. A land contract allows the buyer to pay a down payment that is negotiated with the seller. The buyer can typically pay the down payment in installments over time, which allows the buyer to assume the financial responsibility of real estate that they would not otherwise be able to afford.
The flexibility of the down payment term often extends to the monthly payments as well. For instance, a land contract may provide for a balloon payment, where the buyer pays small monthly installments for a given time, and then must make a balloon payment to the seller in order to satisfy the contract. This type of land contract can provide the buyer sufficient time to obtain a loan from a mortgage lender after the balloon payment became due, while trying to obtain favorable financing terms considering the status of their financials and finances.
Land contracts are often not recorded with the Register of Deeds Office. This protects the privacy of the buyer. It also protects the buyer from the seller and others claiming that the buyer does not own the property.
Michigan law is very protective of land contract buyers. For instance, a seller can only collect a part of the purchase price as a down payment. If the seller requests the full purchase price as an up front payment it converts the agreement from a land contract to a loan agreement. A seller cannot bring a court action against a land contract buyer to take possession of the property until the buyer has been provided a notice of default and provided a chance to repair the default.
What are the Pros/Cons for Sellers?
A Seller might enter into a land contract because it allows the seller to collect regular and often more secure income from the buyer. In general, when selling property on a land contract instead of a traditional sale, the seller may be able to sell the property for a higher price. In this case, a seller may be able to protect himself or herself from potential tax consequences, allow the buyer to obtain construction loans for future repairs or renovations, restructure the deed restrictions at any time, and avoid Probate Court fees. A seller might be willing to sell property on a land contract because the buyer is unable to qualify for a traditional mortgage.
On the other hand, a land contract may have disadvantages for sellers. First, the property remains titled in the name of the seller, the seller is responsible for paying for taxes, special assessments, and insurance, even if not collected from the buyer. Most lenders require that taxes and insurance on real property be taken care of, and require that the property be appropriately insured to protect the lender’s interest. If the buyer fails to pay the taxes, insurance, or maintenance costs, the seller may need to pay these costs, or be responsible for periodic inspections of the property to ensure it remains in good condition. A seller may note that, this is the case even if the land contract calls for the buyer to be responsible for the taxes, insurance, and other due amounts. Further, a seller may need to foreclose through a court in the event the buyer defaults in his or her payments. If the buyer does not have the funds to pay judgments on the property, then the seller may be required to pay the judgment as well. This process may be lengthy and costly, and could leave the seller stuck with an out-of-pocket expense and lengthy court battle.
Due to the seller taking on risks in a land contract, it is important that a seller fully understand the risks involved in the transaction. Overall, a land contract has its advantages and disadvantages.
Legal Requirements and Protections
In Michigan, the law requires land contracts, like most other real estate contracts, to be in writing. This is to ensure that the terms of the agreement are clear and enforceable. The law also requires that all land contracts contain certain information, such as the names of the buyer and seller, the legal description of the property, and the purchase price. Having this information is essential for ensuring that the land contract can be properly recorded with the county register of deeds, should either party choose to do so.
While it isn’t a requirement, it’s a good idea to record your land contract with the county register of deeds, along with any other documents required to adequately convey the property. Doing so puts the world on notice of your rights to the property, even if you don’t live on it. If you don’t record the land contract, you risk the possibility that someone else might record a deed to the same property, or even obtain a mortgage on it, making it difficult or even impossible to determine who the true owner is. Recording a land contract also puts the world on notice of your interest in the property , meaning that creditors are less likely to succeed in enforcing liens against the property because you have superior rights to it.
As a buyer, there are several protections built into land contract law. For instance, Michigan law requires a seller to hand over the deed to the property once the buyer has made all of the scheduled payments and the purchase price has been satisfied. This is unlike rent-to-own agreements, which allow the seller to keep the title until the buyer has made all of the scheduled payments. In addition to this legal protection, Michigan law also provides simple remedies if the seller were to default on the agreement—you could either choose to terminate the agreement, or maintain the agreement and receive damages resulting from the seller’s default. Unfortunately, there aren’t many protections built-in for sellers in case the buyer defaults. The remedies available depend on whether the buyer occupies the property. If the buyer does not live on the property, you may have the right to terminate the contract upon the buyer’s default. However, if the buyer does reside on the property, you will likely have to go through the same process used in an eviction proceeding.
How to Complete and Execute a Michigan Land Contract Sale
In the event that the Parties to a Land Contract are not represented by realtors or the selling of property by a developer, the negotiation process of entering into a land contract may take the form of an exchange of purchase agreements which incorporates the specificities of the terms. In this way, the following step-by-step process is typically observed in the drafting and execution of a Land Contract:
- (1) Identify the property
- (2) Review the title to the property
- (3) Drafting purchase agreement – (Negotiation of terms)
(a) Purchase Price
(b) Down Payment
(c) Purchase Money Mortgage
(d) Interest Rate.
(e) Monthly Payments
(f) Due Date
- (4) Execute Purchase Agreement
- (5) Conduct Title Search
- (6) Prepare/addendum to the land contract (A purchase agreement must be executed before a land contract can be entered into with a Party)
- (7) Execute the Land Contract
- (8) Enter into a conveyance of deed or contract for deed to the Purchaser which must be recorded; after a certain period of time; this occurs after the Purchaser has made timely payments to the Seller of the land contract. This is typically based on a percentage of completion of the construction of the improvements and is also at the discretion of the Seller.
- (9) Record the deed and do a lis pendens in the office of Register of Deeds.
What to Do About Disputes and Defaults
Although a land contract may allow a party to enter the property as a matter of default, not every Michigan land contract is created equal and a dispute could arise with respect to some contractual provision making it necessary for either a buyer or seller to seek legal recourse.
A demand for possession to cure the default is a common first step (See Land Contract Demand for Possession – Michigan). If an eviction process is necessary to obtain possession, there are two types of actions: Forcible Entry and Detainer and Summary Proceedings for Possession of Premises – in both instances, a summary proceeding (eviction) is utilized to obtain possession. An unlawful entry occurs where a party without color of title enters the premises without the legal right to do so. The legal proceeding to oust an unlawful occupant is called a forcible entry and detainer action (M.C.L.A. §§ 600.5801 et seq); In other words, if one enters the property without a legal right to do so, forcible entry and detainer is the method utilized to oust him/her from the property. A summary proceeding for possession of the premises allows a party who is legally in possession of the property to evict the occupant based on a breach of the lease or under the terms of the written agreement between the parties. In the event an occupant fails to evacuate the premises voluntarily, a party must file an eviction action to oust the occupant.
Common ways to resolve disputes or a buyer’s default under a land contract include:
- Seek Eviction for Default: A party in possession may cure a default by paying any and all outstanding amounts under the land contract.
- Resolve Foreclosure by Advertisement: In Michigan a seller is permitted to foreclose on a land contract if a buyer is in default by paying the amount of the default. Foreclosure by advertisement is accomplished by sending a notice of foreclosure by first class mail, posting, and publishing an advertisement (the notice must also be recorded).
- Seek Damages: If a buyer is in default, the seller may seek damages for the following: (2) the reasonable value of the use and occupancy of the premises; and (3) an attorney fee.
How Land Contracts Are Different From a Traditional Mortgage
One of the first steps you should take when considering a land contract is to compare it with a traditional mortgage. In certain situations, a land contract can be a better alternative for both the buyer and the seller. A land contract typically has lower closing costs than a mortgage and can also result in a quicker closing since the terms are based on a negotiation between the buyer and seller rather than the lender and borrower. Generally, a mortgage lender may make a decision about the terms of the loan in a matter of days or weeks, but a land contract may be negotiated in hours or days.
Also, because nothing is closed until all parties approve of the terms and conditions of the land contract, it allows you to better negotiate your deal and secure a property at a good price. No appraisals, inspections, or other third-party issues (such as a lender’s requirement that a property be in good repair) will hold up the closing of the deal. Land contracts also usually do not call for title insurance, another item that can drive up the costs of a mortgage.
However, there are several important ways that a mortgage is better than a land contract. One major difference is recourse. A mortgage gives the lender recourse against both the property and the borrower in case of default. Get a loan on a house with a mortgage and you will be responsible to repay the loan even if the house is no longer worth the value of the mortgage. A foreclosure provides the lender with the right to recoup any loss by taking the property and asking the borrower for payment on the difference if the property has decreased in value and the real estate market crashed.
Land contracts , on the other hand, only give the seller recourse against the property. If there is a default, the seller cannot go after his money from the buyer. A foreclosure at that point only gives back the property. Any additional money owed from the buyer is gone for good. There is no way he can sue for what has already been paid. He can only go after the property.
There is an argument to be made that without recourse, a mortgage might be too risky. If you believe the right buyer could come along and be worth the risk of lending to them, then a land contract may be a wise choice. In contrast, if you think you would like to have more security, a mortgage may be a better option.
The way the borrower can open up more options for himself can also make it easier for the seller to offload his property and walk away from the deal with cash in his pocket. When a buyer buys a house with a loan from a lender, the money goes to the bank to pay off the mortgage and then the seller gets his payoff. However, if the buyer buys on a land contract, he can use the cash that is generated by the sale of his house to put down on a house. The seller does not have to wait to be paid until the buyer still has the house. Then the seller is not going to be stuck in limbo. He has the payoff he was looking for and can put all of those issues behind him.