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Land Contract Laws

How does a land contract work?

In a land contract, the seller finances the buyer’s purchase of real property; however, the former retains the title on the property till the loan installments are paid off by the buyer. While the seller retains the title, the buyer may take possession of the property and use it for practical purposes. Most contracts require the buyer to make a down payment at the time of initiating the contract. Listed below are some of the top questions on the subject answered by Legal Experts.

In a Land Contract, is the buyer considered a tenant?

Additional Question: If so, should the buyer pay the outstanding utility bill in the owner's/landlord's name in order for such service to be connected?

Typically, the buyer becomes the owner of the property and is not considered a tenant. However, as far as the utility company is concerned, any dues owed by the seller prior to the date of the land contract will be his/her liability and not yours. If the seller refuses to pay, you may charge the seller by deducting the sum from the closing statement. Or, you may pay the utility company to get the service up, where you will be entitled to a full reimbursement. The seller will be responsible for the bill in either situation and will be obligated to pay it. .

What is the process for having a property revert back to original owners' name in court if new owners default on the signed land contract?

You could start with creating a written statement documenting your mutual agreement to annul the land contract. This document should state that you are entitled to the payment made so far and that it releases the buyers from any further obligation under the contract. If the land contract, or any related obligations—such as taxes being transferred—were recorded, you may want to obtain a Quit Claim deed and have it recorded as well.

What's the legal recourse if, after a land contract is signed for the sale of a house, the buyer passes away and payments stop? 

Case Details: The house was sold on land contract four years ago.

If the buyers default on the property, you may have to repossess the property by evicting them. You may not avail of any “self-help” process like changing the locks, or shutting off the utilities. You start with serving them a seven-day Notice to Quit for having defaulted on the payments. If they fail to vacate the premises within the stipulated period, you may file a petition for formal eviction, which, if granted, allows you evict them with the help of a sheriff.

Post this, you can file a suit to recover the rent that is due along with damages not covered by the security deposit. Once you get the judgment in your favor, you may proceed to attach their assets to recover damages.

How may I evict the buyer who is occupying the house sold on a land contract?

Additional Questions: The buyer has served me a Quit Claim. Can I sell the house while it is being occupied? How long will I have to wait to start foreclosure?

If you accept the Quit Claim deed you may start the eviction process immediately by serving a notice to vacate the premises. Also, accepting the Quit Claim deed makes you the legal owner of the property and allows you to pursue a claim for the difference amount between what was owed by the buyer and what the property is later sold for. However, if the property is sold for exactly what this buyer owed you under the land contract (s/he owed you $60,000 and you sell it for $60,000), s/he would have no obligation to pay you. Of course, you would have to sell it according to its fair market value.

You may sell the property while the tenant is still occupying it except for the practical difficulties of finding a new buyer who would be willing to purchase the property with a non-paying tenant occupying it. It may be sensible to hire a local attorney to assist you with the legal process.

Who is responsible for the taxes owed in a land contract/lease purchase deal?

Case Details: The original owner’s name is still on the deed and nothing is specified in the closing papers.

The obligation for tax payment will apply differently in both cases—namely a land contract and a lease contract—because both have entirely different legal implications. In a land contract, the ownership is transferred to the buyer and the seller only holds the title to the property, which is transferred upon the fulfillment of the loan amount due. In this case, the purchaser is responsible for the taxes.

However, in the case of the lease purchase agreement the landlord retains the ownership of the property till the end of the financing term when the lessee, or the tenant, has cleared all payments due. Here, since the deed is not in the tenant’s name till completion of the payments, the tenant will not be responsible for the taxes. Of course, unless the contract states that the tenant is responsible for the taxes, s/he will not have any obligation.

The legalities of land contracts vary with each state jurisdiction. Typically, land contracts are short-term financing offered by the seller where, compared to a regular amortization period, the payment schedule is shorter. Such contracts may be used by buyers who do not qualify for a loans offered by mortgage lenders or banks. It is always best to seek help from Legal Experts before entering into a Land Contract to secure your interests.

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