The Basics of a Land Contract
The first thought that comes to many homebuyers’ minds when they hear the term "land contract" is a property being purchased in exchange for a lump sum payment now and several payments over time until the total price of the property is paid in full. As a real estate attorney, I frequently hear land contracts defined as "like a mortgage but without the bank getting involved at all" or "no down payment and no interest." Both of these ideas are true in many situations, but they do not tell the whole story.
Under Wisconsin law, "land contract" is just another word for a "contract for deed." It is not a mortgage (which is a form of security interest), nor is it the purchase of property by installment contract (which is a consumer transaction involving a seller usually retaining ownership of the property until all payments have been made). Land contracts are governed under Chapter 706 of the Wisconsin Statutes , so their terms are flexible. They work much the same way as a mortgage, although there is no requirement that the parties follow the same procedures. However, in order to be enforceable against subsequent owners of the property, it must be in writing, recorded in the office of the Register of Deeds, contain an adequate legal description of the property, and contain a statement that a transfer is intended. Thus, the vast majority of land contracts will follow the same basic form used for mortgages, and be recorded in the same manner as mortgages. Other standard provisions include the interest rate on the purchases, the amount purchased, the method of payment, how late payments will be treated, and how the purchase can be terminated if a payment is missed.
How a Land Contract Operates in Wisconsin
A land contract is a formal agreement between a buyer and seller, but rather than being a purchase and sale agreement, it’s more like buyer-financing agreement or seller-financed mortgage. The fact that it’s similar to a real estate sales contract can be misleading, and that’s why another name is used for the arrangement. It’s called a "contract for deed," which sounds to be more accurate to, but even still, it means that the buyer has no deed to the property until the agreement is satisfied – in other words, the full purchase price has been paid.
Land contracts are often described as "for deed because they eventually result in the buyer obtaining the deed to the property. The key issue with a land contract is that the seller has retained title to the property during the time period it takes the buyer to pay for the property. As long as the buyer meets the terms of the land contract by paying the mortgage and complying with all other obligations, the buyer should be able to obtain legal title to the property. The seller does not maintain a right to reclaim the property simply because the property is deeded to the buyer.
If the buyer stops making payments, the seller has the right to begin forfeiture proceedings, which is a process in Wisconsin that is not the same as foreclosure. Given that the property belongs to the seller until the agreement is satisfied, if the buyer stops making payments, the buyer may indeed lose both the property and money already paid on the property. For instance, if the buyer pays $10,000 down on the property and a few years later refuses to continue payments, the seller can take back the property without returning the money already paid by the buyer.
In Wisconsin, land contracts have all the same legal requirements as mortgages. Articles 420.11 to 420.20 of Chapter 420 of the Wisconsin Statutes provide all the details related to such transactions.
Advantages of Using Land Contracts
There are various reasons why a buyer or seller may seek to use a land contract. First, land contracts offer flexibility, as they can simply be drafted among the parties and do not have to go through the standard home financing processes which take longer and require more paperwork. Second, one reason that sellers may prefer land contracts is that they can often get a higher purchase price (compared to a conventional sale) and they can seek a higher interest rate. Moreover, even though not required, land contracts can be used as a way to avoid the onerous provisions of the Wisconsin Real Estate Condition and Disclosure Offer Update Form. For buyers, the most common attraction is the ability to either avoid financing entirely or to finance a smaller amount of the purchase price. The lack of upfront requirements of a traditional mortgage means that buyers may be able to purchase a home sooner than they otherwise would. Further, the buyer may save money in the short term versus a conventional mortgage because Wisconsin law allows up to a 6 month grace period before a seller can foreclose on a property for missed payments.
Potential Issues and Risks
The first question that most buyers and sellers of Wisconsin real estate consider in connection with their proposed sale is "Is this a good idea for me?" These same questions should be asked when dealing with a Wisconsin land contract. As with any transactions, there are pros and cons, but a homeowner will want to avoid those pitfalls before entering into a land contract.
Risks
Default Risk. Even though a land contract can be a good deal for a buyer, there is the risk that the buyer may not fulfill its obligations under the land contract. In this scenario, land contracts shift the risk of loss from the seller to the buyer because the buyer is not going to receive any money back in a foreclosure if it has failed to make its monthly payments or keep in good repair the interior and exterior of the home. Even after foreclosure, the defaulting buyer may be entitled to recover equity in the home upon foreclosure.
Land contracts give the seller the right to take back the home without the same procedures as foreclosure. Under a land contract, an equitable remedy of "forfeit" may be available upon the buyer’s default. Forfeiture gives the seller a speedy remedy of reclaiming his home if the buyer does not fulfill the land contract. At the heart of the land contract remedy is that the seller can reclaim the property without strict adherence to the procedures and time requirements mandated by state law.
Land contracts also have the potential to cause confusion if the seller is not clear on the legal consequences of foreclosure. Sellers have a choice between exercising their right to reclaim the property or bringing a foreclosure action to satisfy the entire debt owed. The terms of the contract determine whether the buyer will be entitled to recover any of his investment in the home upon the completion of foreclosure. Because of this, a seller must carefully choose which procedure he prefers, as he cannot choose both.
In addition to the risk of the buyer defaulting on the monthly payments or on future taxes that come due, a seller may also be at risk of having to pay an added sum either pursuant to an agreement or assessment by the county or school district in order to collect all of the tax payments. Depending on the agreement, the seller may be required to pay the tax amount due each year or the buyer may be required to pay the annual taxes due to the seller, who then pays them to the taxing authority.
Interest Rate. Because of the increased risk to a seller in the event of default, the interest rate on a land contract is often higher than the current prevailing mortgage rate. Interest rates on land contracts are frequently higher than 6% and are sometimes double the prevailing mortgage rate. Because interest paid by the buyer often exceeds $600 per year, a seller will need to file a Form 1099 with the Internal Revenue Service, acknowledging the amount of interest the seller has received. However, the interest paid by a homeowner on a land contract will not be tax-deductible. The interest is not tax-deductible because the land contract takes the form of an installment sale and is not a demand obligation by the buyer.
Failure to Meet Contract Terms. As a practical matter, the provisions of the land contract must be fulfilled. Failure to perform the contract terms as agreed upon will be viewed disfavorably by a court. A contract is a private law and must be followed by the parties. Failure on the part of one of the parties could result in the terms being enforced as agreed to by the parties.
Legal Restrictions and Obligations
Any sales contract in Wisconsin is legally binding and must be fulfilled as per the terms and conditions. However, it is absolutely essential to know what steps you need to comply with when dealing with land contracts. The legal requirements regarding Wisconsin land contracts are straightforward but must be properly adhered to.
When it comes to Wisconsin land contracts, there are four primary obligations you must fulfill. These obligations apply for every property transfer involving a land contract or any other type of real estate sale contract. First, you must ensure that no information about the sale is hidden. Provided that the purchase agreement satisfies all the legal requirements, the buyer will have legal title to the property once the last payment has been made. Second, you must give new owners the right of peaceful possession and enjoyment of the property. Wisconsin law requires that you cooperate with the buyer when transferring the property—unless the buyer fails to follow the contract terms. Third, you must provide a clear and formal deed that accurately describes the land you are selling. Finally, you can legally remove the buyer from the property once the agreed-upon payments as per the contract are made .
In Wisconsin, any person may buy or sell any property, whether by means of sale, lease or otherwise. Furthermore, if the buyer of the land contract fails to pay for even one installment of the payment or the property taxes, the seller can attempt to enforce a contractual lien on the property. By doing this, the seller will have the ability to take away the land and evict the buyer from the property.
Wisconsin law prohibits the seller from withholding or delaying the deed for any reason—including the buyer’s failure or refusal to make payments under the land contract, needs for specific repairs, acquisition and placement of insurance, and property tax payments. However, you can arrange an equitable recapture of all unpaid interests and costs involved in transferring the property—in accordance with the contract—when a foreclosure action is filed. In addition, you are permitted to ask for a reasonable cost to prepare the deed for the buyer.
In case the buyer defaults, the seller may obtain the property after repossessing the land according to the terms specified in the contract. The legal proceedings can be either assignment of rents, receivership, foreclosure through strict foreclosure, strict foreclosure under a land contract, or execution of judgment.
How to Create a Land Contract
As with nearly all real estate contracts, you should ensure that you properly identify the parties. The seller(s) are the current owner(s) of the Property. The buyer(s) are the current applicant(s) for the loan with the bank as the mortgagee. Sometimes the sellers are a married couple, and sometimes they are single; one may be dead or the property may be in a trust or in an estate. All of these issues could affect how the property is identified, and if there is more than one seller you must carefully consider whether the agreement needs to contain any more legal details or if a simple "TBD" suffices. It’s even possible that there are business entities involved such as corporations or limited liability companies. You must identity everyone properly to avoid a claim of a breach of contract.
Then we say what the parties are agreeing to do under the land contract. The basic terms are the same as a regular sale contract, it’s just that the seller is financing the purchase instead of the bank. The buyer pays the seller a down payment and the seller finances the rest of the purchase on a land contract, rather than the bank financing the purchase. In all other respects this part of the contract is the same as any other sale contract. As mentioned above, the buyer should have a home inspection. We recommend that the buyer have a lawyer draft the offer too because there are some complicated legal issues in any land contract sale and without that experience it’s very easy to miss one.
After the offer is accepted, a title search should be run by a lawyer to check out the seller’s title. The buyer should also have the title searched. When you’re the buyer you can go over the title documents and point out problems, but that rarely happens. It doesn’t mean anyone tries to hide anything, but the reality is people often don’t understand or notice things that are a problem until they want to sell or refinance – then they get sold on the idea that it has to be fixed and it’s a fair assumption that it was known when they bought it. By that point they’ve gotten used to it. So the lawyers have to check out the title. Tom Gorham, a former real estate lawyer in Madison, once pointed out to me that title insurance companies are essentially trying to do the same thing but on the cheap, while lawyers check the title thoroughly but charge a few bucks more. An attorney can usually do this kind of work for about $2,000-5,000, depending on the complexity of the title issues. The land contract will need to deal with how the payments will be made for the term of the land contract. It will also need to address what happens if the buyer can’t make the payments. What happens if the buyer defaults on the land contract? This can be a real mess for everyone, but is easy to set out in writing. Yes, at first blush it sounds like the seller would get to keep the house and walk away with all of the buyer’s money. That could happen, but let me stress the likelihood of that happening in real life is basically zero. Somebody always has a lawyer (or should) and all someone has to do to prevent that scenario in writing is to create certain protections for the seller in the event of foreclosure and to give the buyer the right of first refusal on any assignment of the land contract. In the real world most people want to be nice to each other and do the right thing. Sometimes things go south, and the goal when writing the land contract is to make it clear what protections the seller has and to make it clear what rights the buyer has.
Enforcing a Land Contract
When disputes arise between parties to a land contract, understanding the appropriate course of action for resolution becomes essential. One of the most common disputes is a seller’s failure to convey clear title upon completion of payments. If such a dispute arises, a buyer may be able to force the sale of the property through an action for specific performance. If a seller refuses conveyance, he or she may also have committed a breach of the land contract, the remedy for which depends on the circumstances of the case. The buyer may also seek damages to recover sums paid on the land contract and possibly any appreciation in value while the contract was in effect. Because breaches of contract can be technical in nature, it’s critical to work with an attorney who understands land contract law in Wisconsin. The second type of common dispute is a buyer’s failure to make full payments due under the land contract. In this case, if an amendment to the land contract is not possible, the seller may be able to pursue a "quiet title" action, at which point the court will determine whether the seller is entitled to foreclose on the home and base its decision on the legal dictionary definition of a "quiet title" action. The court may then terminate the land contract, evict the buyer from the property, or order a partition among tenants-in-common, if applicable to the situation. These disputes can become complicated, providing more reason to work with an experienced Wisconsin land contract lawyer.
Summary and Conclusions
In conclusion, land contracts can be a very useful tool for both sellers and buyers in Wisconsin. They can help sellers to retain some rights over the property, while also providing steady cash flow in the form of monthly payments. For buyers, they can provide an alternative way to purchase a property, particularly if they have difficulty securing traditional financing.
One caveat for potential buyers is that they should be aware of the potential pitfalls of land contracts before entering into one. Buyers should ensure that the seller is the legal owner of the property, and that he or she has the legal authority to sell the property to the buyer . Land contracts also tend to have significantly more terms and requirements than traditional mortgage transactions, and require the buyer to make regular (often monthly) payments to the seller. As are all agreements, buyers should ensure that they fully understand the terms before signing and seeking the advice of an experienced attorney can go a long way in protecting the interests of both parties.
Land contracts may not be suitable for all transactions, but they provide a flexible and valuable option to both buyers and sellers in purchasing and selling their property.