What is an Installment Sale Land Contract?
An installment sales contract refers to any contract relating to periodic payments. However, in real estate, it is often called a contract for sale, land contract, or contract for deed. Contrary to the misleading term “land,” a land contract can be used to buy any form of real estate, whether it is with or without improvements.
In an installment sales contract, there are details about the sales price, interest rate, amount of down payment, and amount of periodic (monthly payments) as well as the responsibilities of the parties involved. It encompasses such duties as who will maintain the property, pay for property tax and insurance. Such responsibilities usually fall on the buyer.
The contract will also include the legal course of action for the seller if the buyer does not make timely installment payments.
How it Works
- Contracts for deed or land contracts are a security agreement and involves a seller (Vendor) and a buyer (Vendee)
- The vendor consents to sell a property through financing the property for the Vendee
- The Vendor will retain legal title while the Vendee acquires an equitable title
- The owner-carried financing may involve a pre-existing mortgage balance, or the title of the property can be free and clear, which is the best option
- The Vendee will receive a deed to the property from the Vendor when the payment is complete
Maryland Statute for Land Installment Contracts
The Maryland statute deals expressly with land installment contracts. A seller must carefully review and follow the statutory regulations. The absence to follow these provisions could make the seller liable to the purchaser for a significant amount of money.
For example, the seller must ensure that the contract is a written one; that it comprises certain details specified in the law; that a copy of the contract is given to the buyer; and that the contract is documented in the land records of the county where the property is situated.
The failure of the seller to comply with these provisions may enable the buyer to void the land installment contract as well as make a demand to return all payments made to date.
Moreover, it is the responsibility of the seller to provide an annual statement accounting for all buyer payment installments.
Due to these legal stipulations, the use of land installment contracts is rare in the sale and purchase of personal residences.
Rather, a seller will usually finance the residence through a “take-back” mortgage for the unpaid portion of the purchase price. A “take-back” mortgage by a seller will have priority over legal claims or federal tax liens, which the buyer is liable to pay.
In this case, the meaning of “priority” is that if the seller remains unpaid and has to foreclose the mortgage, the funds from a foreclosure sale will initially be used towards the seller’s mortgage. The excess proceeds (if any) remaining after the payment of the first mortgage and foreclosure expenses will be used to pay off federal tax liens and judgment creditors.
Certain municipal or county liens, such as water bills and real estate taxes, have priority over all types of mortgages, which include seller take-back mortgages.
It is fundamental for the seller to cautiously weigh all their options before financing real estate for a buyer with a poor credit score, particularly if there are tax liens or creditor judgments recorded against them.
Foreclosure is often cumbersome, expensive, and time-consuming. It may be impossible to collect foreclosure costs. At times, it may be a better idea to sell for a less amount to a buyer who is sure to pay the purchase price.
All-inclusive (Wrap-around) Land Contracts
An existing mortgage is a part of wrap-around contracts. The Vendee will make one payment to the Vendor. The Vendor, on receipt of the payment, clears the underlying lender’s payment and keeps the remaining amount.
If the rate of interest on the existing mortgage is lower than the interest rate stated in the contract, the Vendor stands to earn additional interest on this money, which does not belong to them. This situation is called an override.
A straight contract does not have any override of interest. In a straight contract, the Vendee can choose to make a direct payment to an existing lender and pay the Vendor separately, or the Vendee can agree to make one payment to the Vendor, and then the Vendor pays the underlying lender.
Foreclosure under the Power of Sale
There are certain title companies that draft and insure contracts for deed that comprise a Trustee, a Vendor, and a Vendee. You might need to research and identify such title companies. This works similar to a trustor in a trust deed. The trustee will be assigned right, interest, and title by the Vendor and Vendee with the objective of securing both parties’ obligations.
If the Vendee discontinues making payments, the Trustee will have the power to foreclose the property under the power of sale. However, the process of filing a notice of default differs between states.
Rights of the Vendee
The Vendee, for all practical purposes, owns the property and has the following rights:
- Right to quiet enjoyment and use of the residence
- Exclusion, forcing trespassers to leave the property
Advantages for the Vendee
- No qualifying necessary, although the seller could ask for the buyer for a copy of their credit
- Flexible down payment amount, this payment is negotiable
- The interest rate, length of the contract for sale, and installments are negotiable
- Reduced closing costs due to no involvement of lender fees
- Fast closing within seven days or less
Advantages for the Vendor
- Relatively higher sales price with no appraisals, but it is advisable for buyers to get an appraisal done
- If taxable, the sales proceeds may be eligible to qualify as a deferred gain
- Monthly earnings
- Typically, a higher rate of return compared to placing funds in money market accounts
- Quick closing
Things to Do for Buyers
Buyers should obtain an appraisal as well as title insurance for the property. They should identify a holding company to take possession of the original paperwork and executed deed.
It is a very good idea for buyers to consult with an experienced real estate attorney for more clarity on the do’s and don’ts when purchasing a property.
Things to Do for Sellers
Sellers should review the credit report of the buyer. The existing insurance policy should include the names of both the Vendee and the Vendor. It is critical for sellers to engage a disbursement company to manage contract collection.
Sellers should also consult a skilled real estate attorney to ensure that their interests are fully protected throughout the sales process.
Talk to an Experienced Real Estate Lawyer
An experienced real estate attorney at Evans Law can assist you every step of the way in your sale or purchase process. By taking the right measures and precautions in your selling or buying transaction, you can ensure a smoother and more seamless transaction. Message us online or call our office today at (410) 626-6009 for a free consultation.