Selling on a land installment contract?

Imagine you are trying to sell a piece of property, but no one is making any offers.  That is, until a prospective purchaser offers to buy the property on a land installment contract.  You can hardly contain your relief at being able to move on, so you sign the contract without understanding some of the terms, or even what a land installment contract is.  That leads to the questions, “What did I just sign” and “Did I agree to something I shouldn’t have?”

A land installment contract (also known as an installment contract or a land contract) is an agreement between a seller (vendor) of real property and a buyer (vendee), pursuant to which the vendor agrees to sell real property after the vendee pays a series of installments and other obligations set forth in the land installment contract (such as payment of real estate taxes and assessments, utilities, etc.) over a set period of time.  Essentially, the vendor is acting as a lender in the transaction by allowing the buyer to make a series of small payments not unlike a mortgage payment.  From a legal perspective, the vendor is the legal title holder and the real estate and the vendee is the equitable owner of the property.

Selling on a land installment contract can be beneficial when: (i) the vendor has unsuccessfully listed their property on the market for a long period of time, (ii) the vendor does not need the equity from their property in order to pursue the purchase of their next piece of property, or (iii) a prospective purchaser is having a difficult time obtaining traditional financing (in which case a sizable down payment is preferential).

In addition to the standard provisions you need to watch out for (e.g., the purchase price, the closing date, inspection terms, etc.) there are clauses that can be problematic for the selling party.  One such clause is the vendee’s right to make repairs of undisclosed items on the property, and then deduct the cost of such repairs from the final payment.  That clause could sound as innocuous as something like this:

In the event that the vendors fail to pay any amounts due and owing hereunder, the vendees may pay such amount at buyers’ complete and sole discretion, and thereafter deduct the amount of such payment from the final payment.

On its face, this clause doesn’t sound problematic, but when coupled with other clauses in the land installment contract, such as the following, it becomes an issue:

In the event that any representation or warranty of vendors is false, vendees shall have the right, at their absolute discretion, to either: (i) rescind this agreement and refund all amounts paid under the same or (ii) reduce the final payment owed to vendors for any and all losses, liabilities, costs, or expenses associated with vendors’ false representation or warranty; provided, however, that no reduction may occur for losses, liabilities, costs, or expenses associated with any replacement, maintenance or repair of an item on the property that was conspicuously disclosed to vendees.

Essentially, this gives the vendee the power to make repairs on any item on the property that is in need of repair, which need is at the vendee’s absolute discretion.  The scrupulous vendee may elect to fix the most minor damage, regardless of the cost, because the cost will be deducted from the final payment and the vendee won’t lose any money.  Instead, the vendee obtains all of the benefit, and the cost for such benefit will come straight from the vendor’s pocket.

Ultimately, if your property has been on the market for a long period of time and a prospective vendee offers you a land installment contract, you can breathe your sigh of relief, but do not sign the land installment contract until you are absolutely sure you understand the terms contained therein.  It is highly recommended that you seek legal counsel to represent your interests prior to entering into the land installment contract.

Contact Finney Law Firm to see how we can help you with your real estate needs and transactions.

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