There's a right way and a wrong way to buy on Land Contract, a popular form of seller financing in the Midwest. Here are four mistakes that I see all too frequently in Land Contract sales.
Mistake No. 1: Not recording the Land Contract or a Memorandum of Land Contract in the public records. Recording gives notice to the world of the Buyer's legal rights to the property. Although being in physical possession of the property may provide the same notice, possession is a question of fact that must be decided by a court if the priority of the Buyer's interest is challenged. By recording the contract, this question of fact is removed. The Buyer's interest is there for all to see. A Buyer certainly would record their deed, wouldn't they? Record the Land Contract.
Mistake No. 2: Not having the Land Contract drafted by an experienced Real Estate Attorney. The money saved by using a generic store bought form of agreement is chicken feed if a dispute arises during the term of the contract. There are important legal considerations for both the Seller and the Buyer in an installment sale. The time to negotiate these is before any payments are made and received. Don't expect a $10.00 contract downloaded off the Internet to address all the possible legal issues that can arise in a Land Contract sale.
Mistake No. 3: Waiting until the Land Contract is paid before getting a title commitment. The time to review the title is when the Land Contract is entered into, not when it's paid off. A Buyer should know who else has rights in the property. Are these rights potentially adverse to the Buyer's interest, like a mortgage or other lien for example? How is the property restricted? Are there any easements that might affect the Buyer's intended use of the property? The time to answer these questions is before the Buyer starts making payments, not after they're finished.
Mistake No. 4: Not requesting an Owner's Title Policy at the time the Land Contract is signed. Often times we are asked to "hold the title commitment open" until the Land Contract is completed and a deed is recorded. This is a misinformed request usually related to someone (including even a few title companies) not understanding that a Land Contract transfers equitable title of the property to the Buyer. It's no big deal for the title company to adapt an Owner's Policy to insure the Buyer's Land Contract interest. If the policy is not issued, the title commitment expires, the title underwriter is not paid, and there is no title coverage protecting the Buyer's interest.
Entering into or accepting seller financing is a serious decision. Many factors must be weighed. In the end though, the Buyer is buying the property. Just as if the Buyer got a mortgage and the seller gave a deed. Avoid these mistakes. The expectations of your title company in a Land Contract sale are no different than in any other sale.
For additional information about Land Contracts, closings or title insurance send me an email or leave a comment.
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