A number of homeowners exist in a kind of legal limbo between being renters and having a mortgage. They are not renting under a lease agreement, but they have not bought the property and obtained a mortgage. As well, they do not own the home they are living in outright. Instead, they have an agreement with the actual owner of the property under a land installment sales contract.
These contracts, also known as installment land contracts, land sale contracts, long-term land contracts, bonds for deed, or contracts for deed, are simply alternatives to a mortgage or deed of trust. The buyers take possession of the property and make monthly installment payments to the seller. These monthly payments consist of principal and interest, and at the end of the contract, the buyers will own the property outright.
While it sounds quite a bit like a standard mortgage, there are some important differences between a mortgage and a land installment contract. First, the seller is also the financier of the purchase, and the seller retains title to the property for as long as the contract is in place. It is only after the buyers have paid on the contract for the required period of time that they are granted full ownership rights.
The buyers, though, have more responsibility than with a rental agreement, and also more ownership rights. In the typical contract for deed, the buyer is viewed as the equitable owner of the property, is given full possession, and is required to maintain the house. The buyers, then, have rights to do anything to the property they want, as long as it does not interfere with the security interest of the seller.
Land installment contracts also usually allow sellers to avoid the standard foreclosure process if there is a default. Because the buyers do not have title to the home, the sellers may be able to use a process called forfeiture. This allows the seller to forfeit the contract, take back possession of the home, and retain all of the principal and interest payments made to date as rent or damages.
If a land installment sales contract is forfeited, the buyers may then be treated as tenants of the property. And if they are not paying as agreed on the contract, the seller will be able to bring an eviction action against them. However, as in almost all real estate related issues, the exact function and treatment of these types of contracts depend heavily on the state laws and how detailed the statute are in regards to them.
Some states have extremely detailed treatments of land sale contracts, regulating how they are to be terminated, forfeited, or foreclosed in the event of a default. Courts, as well, may require that all such agreements be terminated through the state foreclosure process, including the right of the buyers to defend any abusive actions in court and to have the property sold at a county sheriff sale.
Many states now require some notice to be given to the buyers of the default and impending legal proceedings, just as in the foreclosure of a mortgage. Buyers are also to be given a reasonable time to cure the default and have the contract reinstated. There are also redemption rights in some states which give former owners the ability to pay off the defaulted amount for land contracts that have been foreclosed.
Forfeiture of land installment sales contracts actually seems to be reducing in popularity. It is viewed as quite unfair for buyers to make payments on an agreement for a period of time and, upon default, to lose all rights to the property and not be given a full foreclosure process to defend their home. There is now even broad agreement that a contract for deed creates a mortgage on the property.
Although relatively few homeowners now use a contract for deed, it may become a more popular method of financing homes as credit stays tight for the average borrower. These agreements can be made between private individuals without the involvement of a larger bank or investment firm, and terms can often be more lenient than with a mortgage. Buyers and sellers should be aware of the drawbacks and benefits of such contracts.