Land contracts are a way of buying a home without a mortgage. Leases with the option to buy and rent-to-own housing contracts are also ways of buying a home without a mortgage. To learn more about those types of contracts, read Leases with the Option to Buy and Rent to Own Contracts.
While not having a mortgage may sound good, land contracts usually have fewer protections for buyers than mortgages. Land contracts usually involve private sellers, not a bank or other financial institution. A land contract should outline what the buyer and seller are supposed to do. It will also say what will happen if one party breaches (doesn’t follow) the contract.
What is a Land Contract?
A land contract is a contract between a buyer and private seller for real property that has a home on it. With a land contract, the buyer does not get full ownership of the property. The buyer is an owner, but they only get “equitable title” of the property. Equitable title is the right to obtain full ownership of property. This is different from legal title, which is actual ownership of property. The buyer will not get legal title until the total purchase price is paid.
Land contracts can make property easier to sell because the seller decides the credit requirements and down payment amount. The parties can also negotiate the monthly payments, including whether there will be a balloon payment. A balloon payment is an unusually large payment due at the end of the purchase period. The parties will also agree on the interest rate. However, in Michigan the interest rate cannot be above 11%. It is possible for the interest rate to change over time, but the average interest rate has to be 11% or less.
In general, the buyer is in charge of making all repairs and paying property taxes in most land contracts. Most contracts also say the buyer must get homeowners insurance.
What Happens if the Buyer Breaches the Contract?
The most common type of land contract breach by a buyer involves payment issues. Any missed or partial payment can cause problems for the buyer. If a buyer misses a payment or doesn’t make the entire payment, the seller can take action. The most common action (called a “remedy”) a seller takes is to forfeit (cancel) the contract. A much less common remedy is foreclosure. A seller can use either remedy for any breach of the contract.
The Seller Can Forfeit the Contract
Most land contracts have a forfeiture clause. A forfeiture clause usually says that if the buyer breaches the contract, the seller can keep all money paid to it. The seller can also take back possession of the home. The seller cannot forfeit the contract without a forfeiture clause.
The first step in the forfeiture process is for the seller to send the buyer a forfeiture notice. The notice can be served in either of the following ways:
In person, by giving it to the buyer or someone living in the home old enough to accept it, with instructions to give it to the buyer
By first-class mail to the buyer’s last known address
This notice must give the buyer at least 15 days to cure (fix) the breach. The buyer can cure a payment breach in a forfeiture by paying the amount in arrears (all the past due payments). The buyer could also voluntarily move out and give up the home. The buyer cannot be forced to move out until much later in the process.
If the buyer voluntarily moves out, this does not cure the breach. The seller could still start a court case. The only way to cure the breach is to pay the amount in arrears or address the breach in another way. However, the seller might only be interested in getting the home back.
If the 15 days pass and the buyer does not cure the breach or move out, the seller can start a court case. They must file a summons and complaint in district court and serve a copy on the buyer. The complaint must list all of these:
The original selling price
The balance remaining
The amount in arrears (past due)
A statement describing any other breaches that would support a forfeiture
The seller must also attach a copy of the notice of forfeiture, showing when and how it was served.
The buyer must respond to the complaint. If the buyer does not, the judge could enter a default judgment against them. A default judgment means the seller could get everything they ask for without a judge ever hearing from the buyer. The summons should have the date the buyer needs to go to court. The buyer can go to court and verbally respond at the hearing or file a written answer or motion with the court. It is best to file a written answer or motion before going to the hearing, but that is not required.
In a payment breach case, if the judge rules for the seller, they will issue a judgment for the amount it determines is past due. The buyer will be able to keep the home by paying the seller or the court the amount listed due in the forfeiture judgment. The amount of time the buyer has to make the payment is called the redemption period. The redemption period is 90 days if the buyer has paid less than 50% of the land contract. If the buyer has paid 50% or more of the land contract, the redemption period is six months. The seller can’t evict the buyer until after the redemption period is over.
Any payments the buyer makes during the redemption period should first be applied to the judgment amount. If the buyer makes payment(s) during the redemption period, there must be a hearing before the seller can get an order of eviction. Even if the buyer doesn’t make new regular monthly payments that come due during the redemption period, they cannot be evicted. However, the seller could file another forfeiture case if those payments remain unpaid after the judgment is paid off.
If a forfeiture judgment is entered against the buyer, and they plan on leaving the home, they may choose to not make their usual payments during the redemption period. If the seller only wants to recover the home, then not making the usual monthly payment may be a good plan. However, the seller could choose to seek damages from the buyer under the contract.
The Seller Can Foreclose on the Home
If a buyer breaches a contract by getting behind on payments, another remedy the seller may have is foreclosure. Most land contracts have acceleration clauses. These clauses allow the seller to declare that the entire remaining balance of the contract (not just the past due payments) is due if the buyer misses a payment. In other words, the buyer will have to pay whatever they are behind plus the rest of the contract amount.
Most acceleration clauses require the seller to give the buyer written notice of an acceleration. The notice will say that the seller will declare an acceleration if all past due payments are not paid by a certain date. If the buyer does not pay all past due payments before the seller declares an acceleration, the seller can start a foreclosure case in circuit court.
Even without an acceleration clause, the seller can try to foreclose on a home after a breach. If the contract doesn’t have an acceleration clause, the buyer can prevent a sale by paying all amounts due, plus costs. However, if the seller misses any future payments, a sale could go forward.
A seller needs to go through circuit court to foreclose on a home. Unlike mortgage foreclosures, a seller in a land contract cannot foreclose by advertisement. They must go through the courts. To learn more about judicial (court) foreclosures, read Foreclosure and Eviction for Homeowners.
If a judge agrees that a debt exists, they will enter a judgment in favor of the seller. The judgment will order a sale of the property, called a Sheriff’s Sale. Once a Sheriff’s Sale happens, if the buyer wants to keep the home, they must pay the entire Sheriff’s Sale price. The buyer can find the sale price by getting a copy of the Sheriff’s Deed from the Register of Deeds in the county where the home is located. The redemption period for this type of foreclosure is six months from the sale.
If someone bought the home during the Sheriff’s Sale for less than the full amount of the land contract, the land contract buyer may have to pay the difference.
Eviction From the Home
After the redemption period following a foreclosure sale ends, the land contract buyer can be evicted from the home. To start an eviction, the new owner must file a summons and complaint in district court, and serve copies of them on the land contract buyer. To learn about the eviction process, read the articles Eviction: What Is It and How Does It Start? and Eviction to Recover Possession of Property.
The land contract buyer is not likely to have a defense to an eviction case because it would have been necessary to raise any defense in the circuit court foreclosure case.
If the judge orders an eviction, the land contract buyer usually has 10 days to leave the home. They can ask the new owner for more time if they have special circumstances. If the land contract buyer stays, the judge could issue an order instructing the sheriff or a court officer to evict them and remove their belongings from the home.
Cash for Keys
If a land contract buyer knows they won’t be able to pay the redemption amount, they can ask if the new owner is willing to work out a “cash for keys” deal. In a “cash for keys” deal, the land contract buyer leaves the home before the redemption period ends in exchange for money. Some new owners will do this because they can get the home faster, and they won’t have to pay the court costs and lawyer’s fees for an eviction case.
Help for Buyers
If you are facing losing the home you purchased through a land contract, you may be able to get some help from Michigan’s State Emergency Relief Program (SER). Visit the Home Ownership Service page on the Michigan Department of Health and Human Services website to learn more.
What Happens When the Seller Breaches the Contract?
A common way land contract sellers breach the contract is by refusing to transfer title of the home when the buyer pays off the contract balance. When this happens, the buyer can file a “quiet title” complaint in circuit court. This asks the judge to either order the seller to transfer title to the home or declare that the buyer is the titleholder. The buyer can only do this after making the final payment.
The buyer could also file a complaint asking the judge to cancel or “rescind” the contract. If the contract is rescinded, the buyer would be entitled to get back money paid to the seller. The buyer would then have to surrender any claim to ownership of the home.
Both of these actions are complex. You may want to speak with a lawyer if you are thinking of starting one of these lawsuits. Use the Guide to Legal Help to find lawyers or a legal services office in your area.
Common Issues for Buyers in Land Contracts
Before a buyer signs a land contract, they should do a title search at their county’s Register of Deeds to make sure the seller has good title to the home. There could be existing liens on the property or other things that limit a buyer’s rights to the property. If the seller has clean title, the buyer may want to record their interest in the property at the Register of Deeds to make sure their interest is protected.
Sometimes homes for sale by land contract require a lot of repairs. Before signing the contract, the buyer should thoroughly inspect the property to see what repairs are needed. It is best to have an expert do this because most land contracts require the buyer to make all repairs and maintain the home.
A buyer should be cautious with subordination agreements. These agreements allow the seller to give others interest in the property that is superior to buyer’s. If you have questions about these agreements, you should speak with a lawyer. If you have a low income, you may qualify for free legal services. Whether you have a low income or not, you can use the Guide to Legal Help to find lawyers in your area. If you are not able to get free legal services but can’t afford high legal fees, consider hiring a lawyer for part of your case instead of the whole thing. This is called limited scope representation. To learn more, read Limited Scope Representation (LSR): A More Affordable Way to Hire a Lawyer. To find a limited scope lawyer, follow this link to the State Bar of Michigan lawyer directory. This link lists lawyers who offer limited scope representation. You can narrow the results to lawyers in your area by typing in your county, city, or zip code at the top of the page. You can also narrow the results by topic by entering the kind of lawyer you need (divorce, estate, etc.) at the top of the page.