Michigan Land Contracts
This article was first posted on ZamzowFabian.com in 2014.
A notable repercussion from the 2010 foreclosure crisis (and beyond), is that institutional credit (i.e. mortgages) availability for residential homebuyers has decreased. This has opened transactions to the increased use of land contracts, in place of traditional financing for the purchase of homes. Land contracts can be used to purchase any type of real estate including: primary homes, second homes, vacant land, and commercial real estate.
What is a Land Contract?
As defined by the State Bar of Michigan “…a land contract is an agreement for the sale of real estate, where the buyer (called the vendee) makes an initial down payment to the seller (called the vendor) and pays the remainder of the purchase price, plus interest in installments over a set period of time. The seller retains the ownership of the real estate…” until the deed is delivered to the buyer.
In Michigan land contracts are similar to a mortgage, because under a typical land contract the purchaser immediately obtains equitable title, and the legal title remains with the seller. Under equitable title, a property interest may be transferred, insured, recorded, encumbered and can be the subject of tax liens and foreclosure.
Land Contract Provisions
From a purely legal standpoint a land contract must satisfy the Statute of Frauds and also meet common law contract principles. However well drafted land contract will go beyond the basic legal requirements to: (1) allow both parties to have a clear understanding of what they are entering into by carefully defining terms and removing ambiguities; and, (2) Protect both each party’s interest in the transaction.
Land contract provisions generally address the following issues:
(1) Payment – this includes the down payment, the amount and number of installment payments, and the interest rate (capped at 11%);
(2) Possession – this states who has possession of the property (usually the purchaser);
(3) Property taxes – who is responsible;
(4) Transfer of deed & transfer taxes;
(5) Liability insurance;
(6) Transfer of ownership;
(7) Condition of the property;
(8) Modification of the agreement; and,
(9) Default – what happens when either party does not fulfill their obligation.
Other issues to consider when considering entering into a land contract include title searches, property inspections, and transfer taxes.
What Happens When a Buyer Defaults on a Land Contract
Depending on the terms of the land contract agreement the buyer and seller may be able to modify the contract to find a reasonable solution for both parties. If the parties are unable to find a solution the seller must use the Michigan Courts to regain possession of the property and evict the land contract buyer. Typical remedies include: suing the seller for breach of contract; forfeiture of the land contract (only available if included in the land contract); and foreclosure on the sale of the land contract property.
What Happens when a Seller Defaults on a Land Contract
In most cases, upon a buyer’s fulfillment of the land contract the seller should provide the buyer the deed conveying the property free of any liens. A seller who fails to do this is most likely in breach of contract. Legal remedies available to the buyer in this situation include: specific performance of the land contract; quiet title; rescind the contract; and/or money damages.
Although useful in many situations, land contracts can be troublesome if not thought-out and carefully drafted.
