Installment Land Contract Considerations
Installment Land Contracts are an important financing tool in the real estate industry. Often called Land Contracts, Contracts for Deed, or sometimes presented as a Lease with Option to Purchase, these types of agreements allow the seller to finance the real estate sales transaction while circumventing the traditional mortgage and deed of trust formalities. When parties enter into an Installment Land Contract, the buyer typically takes possession of the property and assumes the rights and responsibilities of ownership, but the deed is not delivered to the buyer until the contract price has been paid in full.
Buyers like Installment Land Contracts because they do not get caught up in many of the snags which prevent them from obtaining a traditional mortgage. For instance, there are no institutional credit standards or down payment requirements. This makes the path to real property ownership more attainable for many people who otherwise would not have the opportunity to purchase real estate.
Sellers like Installment Land Contracts because they can use Colorado’s Forcible Entry and Detainer statutes (the eviction process) rather than the foreclosure process to terminate the contract and regain possession of the real property. This is because C.R.S. § 13-40-105(1)(i) states that a person is guilty of an unlawful detention of real property when a vendee having obtained possession under an agreement to purchase lands or tenements, and having failed to comply with the agreement, withholds possession from the vendor after demand has been made. Therefore, sellers simply have to fill out and post a Demand for Compliance or Right to Possession Notice (Form JDF 101) in a conspicuous place on the premises to provide notice of the buyer’s default. The buyer will have three days to cure the default (unless the Installment Land Contract provides for a longer cure period) and if the buyer fails to do so, the seller can file a Complaint in Forcible Entry and Detainer. The court will then set a possession hearing within two weeks of filing of the complaint. The eviction process is a much quicker, simpler and cheaper solution than either a judicial foreclosure or a foreclosure through the public trustee.
While there are many advantages to Installment Land Contracts, perfecting these types of transactions still come with a bit of red tape. Pursuant to C.R.S. § 38-35-126, the public trustee of the county where the property is located shall be designated to act as escrow agent for taxing purposes. The Installment Land Contract shall provide that the buyer will make monthly payments to the public trustee which will go towards the tax bill. Each April, the public trustee will then transfer money to pay the tax bill from the escrow account to the county treasurer. Most public trustees designate an alternate, such as a bank or title company, to act as the escrow agent.
Another requirement of C.R.S. § 38-35-126 is that the seller must file with the county treasurer of the county where the property is located a notice of transfer by contract for deed to real property. This notice will not act as a conveyance of property, but simply notices the county treasurer of the details of the transaction. Further, the seller needs to file a real estate transfer declaration (Form TD-1000) with the county assessor of the county where the property is located.
If the seller fails to perform any of his or her statutory obligations, the buyer has the option of voiding the Installment Land Contract transaction and is entitled to return of all payments made on the contract, with interest. Under most Installment Land Contracts, the buyer actually resides on the property which they are purchasing, when a buyer seeks a court’s declaration that the agreement is void, the seller will have an unjust enrichment counterclaim for the reasonable value of rent. This amount may or may not be equal to the installment payments.
If the seller is still paying a mortgage on the property, the execution of the Installment Land Contract may trigger the acceleration of that mortgage debt. For instance, most deeds of trust state that “if any part of the property or an interest in the property is sold or transferred without the lender’s written consent, the lender may require immediate payment of all present or future sums due or to become due.” Since Installment Land Contracts grant an interest in the property to the buyer, the seller will have to obtain permission from their mortgage lender to enter into the agreement or live in fear of the debt acceleration clause.This blog is merely an introduction to Installment Land Contracts. These are but a few of the considerations to account for in deciding whether an Installment Land Contract is the right tool for your real estate sales transaction. Because there is so much to consider in real estate law, there are many other important details which have not been discussed in this blog. Every real estate transaction is different depending on the wants and needs of the buyer and seller. Only a trusted real estate attorney can provide the personalized guidance necessary to ensure a successful transfer of real estate ownership. The attorneys at Jorgensen, Brownell & Pepin have represented hundreds of real estate buyers and sellers throughout the years. Whether you are buying or selling, call our real estate lawyers today to discuss your real estate sales transaction. We can help you determine if an Installment Land Contract is the right tool for you.