Wisconsin Land Contracts
The economy has been slow to recover from the financial crisis, particularly the mortgage and home sales market. Residential foreclosures continue to mount and credit, particularly for real estate purchases, has been harder to come by in recent years. Just because credit is tight, doesn’t mean that buyers don’t have options to finance the purchase of a new home.
In Wisconsin, there are two common “seller financing” alternatives: (1) the seller conveys the property to the buyer and takes back a note and mortgage from the buyer; or (2) the seller and buyer enter into a land contract for the conveyance of the property, subject to certain obligations. The latter is the subject of this article. We will review what a land contract is, how it is drafted and what happens in the event of default. We will also review some of the benefits and pitfalls of using a land contract. Note that Minnesota has a similar seller financing option: the contract for deed, but that discussion is for another time.
A land contract is a written agreement by which a seller, or “vendor,” promises to convey to the purchaser, or “vendee,” real estate upon the completion of certain obligations, typically on an installment payment plan. The land contract is arguably the more common form of seller financing. It allows the parties to negotiate a sale when conventional financing is not available to the buyer, or is not feasible. Because it is a negotiable contract, the parties can benefit from better interest rates (and a better rate of return on investment), payment terms and minimal loan costs. In addition, a seller can control the amount of capital gain from the sale, and even use the sale as a stream of income for the term of the land contract.
The purchaser takes possession of the real estate and agrees to make installment payments of principal and interest, typically on a monthly basis, until the contract is paid in full or balloons. The vendor has legal title to the property until the contract is paid in full, and then must convey the property by deed to the purchaser. During the term of the contract, the purchaser has “equitable title” to the property. This is a distinction from a seller mortgage where the buyer is conveyed fee title and grants a security interest back to the seller.
The land contract is recorded with the Register of Deeds, giving notice to all of the vendee’s interest in the real estate and the vendor’s obligation to convey the real estate upon full payment. The transfer fee is due at the time the land contract is recorded, along with a transfer return. When the buyer conveys the real estate by deed, no additional transfer fee is collected, although another return will need to be delivered.
Provisions of the Land Contract
The State Bar of Wisconsin has a standardized form of land contract known as “Form 11” but it is not always used, so careful review of the specific contract is always necessary. The contract is entirely negotiable as there are no statutory requirements or restrictions like traditional mortgage loans.
In considering a land contract transaction, you will need to determine the following terms at a minimum: (i) purchase price; (ii) down payment, if any; (iii) interest rate; (iv) first payment (often upon execution of the land contract); (v) frequency of installments (typically monthly); (vi) amount of installment and amortization; (vii) maturity date; (viii) restrictions on prepayment; (ix) if either party can mortgage, sell or assign its interest in the land contract; (x) which party is responsible for real estate taxes and insurance during the term of the land contract; (xi) whether there are existing mortgages on the property and if lender consent is required; (xii) which party will pay for recording the contract and the transfer fee.
There are also provisions regarding events of default and period to cure the default; the use of and improvement to the property during the term of the land contract; and the obligation of seller to provide title information.
Default Remedies and Cancellation
If the purchaser fails to comply with the terms of the land contract, often by failing to make payments when due, the seller has a number of means to remedy the default. He may commence a lawsuit for the balance, or each delinquent payment as it comes due in the case where there is no acceleration clause in the contract. This is most akin to suing on a promissory note since the seller can get a money judgment and then enforce the judgment through typical collection efforts, such as garnishing wages or levying assets.
Alternatively, the seller may commence a lawsuit to terminate the land contract and extinguish the purchaser’s interest, similar to a quiet title action. This approach makes sense where a purchaser has left the property, or “abandoned” it, and the seller simply needs title to be clear to pursue selling to another party, or take other measures. The vendor may also sue for specific performance of the land contract, keeping the purchaser on the hook for the full sale price. Again, this works similar to a mortgage foreclosure, where a deficiency judgment can be entered against the purchaser following the sheriff’s foreclosure sale. Like the foreclosure of a mortgage, there is a period of redemption whereby the purchaser could save her investment and the vendor would have to deliver a deed to the property. The unique aspect of the land contract foreclosure is that the period of redemption is not set by statute (other than to require a minimum of seven working days,) but is determined on a case-by-case determination by the circuit court. In most cases the court sets a period that is less than the conventional mortgage redemption period of six or 12 months.
But, most frequently, the seller uses the remedy of “strict foreclosure” to terminate the contract. In strict foreclosure, the seller decides to terminate the land contract, assume possession of the property and clear title. In the lawsuit, he asks the court to set a period of redemption during which the balance of the purchase price must be paid, or, the contract will cancel and title to the real estate (including the equitable interest of buyer) reverts to the seller without any further adjudication or sale. In exchange, the seller gives up the right to collect the balance of the purchase price or any deficiency judgment, but may still recover fees and expenses relating to the foreclosure. If redemption expires and the purchase price has not been paid, the seller’s attorney simply files an affidavit to this effect and asks for an order from the court confirming the judgment.
Of course, the land contract will dictate which remedies are available to the seller; yet another reason to review the specific contract carefully before entering into it.
Benefits of the Land Contract
The benefit of using a land contract for a seller hinges heavily upon the alternative of a straight deed to the buyer and subsequent mortgage back to the seller. Foreclosure of a mortgage is much more time consuming and costly than the strict foreclosure of a land contract as described above. This is the principal benefit to sellers. In fact, it is such an attractive remedy alternative that in some cases, lenders have attempted to make a loan transaction appear to be a land contract in order to get the benefit of the strict foreclosure.
The purchaser benefits from a land contract to the extent that it allows her to purchase property when she cannot obtain conventional financing. The land contract saves a considerable amount of expense in loan closing costs, but does not offer the same protections as a mortgage.
Disadvantages of the Land Contract
The disadvantage of the land contract falls primarily on the buyer. Unlike a mortgage, the land contract is not subject to the same statutory redemption periods. In fact, if you default on a land contract as purchaser, the consequences are swift and serious. The only requirement is seven days to redeem, which is a very short period if you are suffering financial difficulties.
A seller has the disadvantage of a land contract being a less marketable investment than a mortgage. In other words, in the event the seller wanted to cash out of the transaction, it is more likely that he will find an investor to take an assignment of a mortgage than a land contract. While this makes little sense, it is the practical reality of selling interests in land contracts.
In summary, land contracts are a good option for sellers because it may expand the pool of eligible buyers and the return on investment is higher than a typical savings plan. Land contracts offer buyers the opportunity to purchase real estate despite tight credit, and to negotiate repayment terms that are reasonable and sustainable for the buyer in the long term. As with any legal transaction, it is always advisable to consult with your attorney before signing a land contract!
By: Dehlia Seim
Published in Business North, October 2011