assignment of seller's interest in land contract

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Twelve Things You Forgot About Using Land Contracts

With more land contracts in use recently, a land contract refresher is in order! A land contract may be used when the seller finances the buyer’s purchase of the property. The land contract buyer pays the seller in installments and receives a deed when all payments have been made. As an alternative to the seller giving a deed and taking back a mortgage, the land contract seller reserves title to the property as security. The parties may use a land contract to negotiate a sale when conventional financing is not available to the buyer or is not feasible. 

1. What is a land contract? 

A land contract is a form of seller financing. It is a written agreement by which a seller, or “vendor,” promises to convey the seller’s property to the purchaser, or “vendee,” if the vendee makes payments under an installment payment plan. 

The land contract purchaser takes possession of the real estate and promises to make installment payments of principal and interest, typically on a monthly basis, until the contract is paid in full. Often there is a large payment due at the end of the term and the purchaser may need to secure traditional financing or find another source to make the final balloon payment. 

2. What is the difference between legal title and equitable title? 

A common misconception among parties to land contracts is that the “sale” has not yet occurred because a deed has not yet been given. Actually, the sale of the property occurs when the land contract is executed and possession is delivered to the buyer.

During the term of the contract, the purchaser has “equitable title” to the property and takes physical possession. The purchaser becomes, for all practical purposes, the owner of the real estate. 

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. Under Wisconsin law, the seller has conveyed his ownership interest in the property and retains “bare legal title” as the seller’s security interest in the property. The vendor retains legal title, but that title is really only held as security for payment.

3. What are some advantages for the seller?

A land contract can attract buyers who face various obstacles in qualifying for traditional mortgage loan financing. The seller may also be able to attract a broader range of potential buyers by offering land contract financing. Enforcement of a land contract is somewhat easier than enforcement of a mortgage, but the seller assumes the risk that he or she will have to retake the property and resell it.

4. What are some advantages for the buyer? 

A land contract allows a buyer who is not able to secure traditional financing to purchase real estate. The buyer has time to work on any credit issues he may have, including lowering his debt-to-income ratio, and to save for the down payment on a traditional loan used to make the balloon payment on the land contract. Land contracts are also used when the buyer is related to the seller. 

5. Is there a problem under the SAFE Act for brokers drafting offers calling for land contracts?

Changes to the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act) were made in Wis. Stat. §§ 224.71-224.77 to remove many of the prior seller financing limitations on agents drafting seller financing offers as well as sellers providing seller financing when selling their own properties. There is now an exemption for sellers not regularly engaged in the business of a loan originator who occasionally offer seller financing on five or fewer transactions per calendar year. The same is true for a broker writing offers on five or fewer transactions where seller financing is offered.

Another new exemption in Wis. Stat. § 224.71(13) is intended to exempt real estate brokers who are engaged solely in the practice of real estate brokerage and use state-approved forms. Brokers will not be required to register as mortgage loan originators if they negotiate offers with seller financing as long as they use the forms approved under Wis. Admin. Code § REEB 16.03. That rule approves real estate licensees to use the forms such as the WB forms approved by the REEB; forms prepared and approved by the state bar of Wisconsin including deeds, mortgages and land contracts; out-of-state forms for out-of-state real estate and business transactions; and forms prepared by government agencies such as the FHA or VA. 

6. Are there approved forms for a land contract?

Yes, the State Bar of Wisconsin has a standardized form of land contract known as a “Form 11 Land Contract.” 

7. Can all licensees draft a land contract?

No, only those licensed as a Wisconsin real estate broker may use the State Bar forms. Wis. Admin. Code § REEB 16.03(1)(a) allows brokers to use forms prepared and approved by the State Bar of Wisconsin for deeds, mortgages, mortgage notes, land contracts, release of mortgage, satisfaction of mortgage, assignment of mortgage and assignment of land contract. That same privilege does not extend to those with a real estate salesperson’s license. 

Brokers, however, should be cautious about inadvertently providing legal advice to parties. As always, if the parties have questions about what is best for their personal financial, tax or legal situation, they should be urged to consult with their financial, tax and legal advisors.

8. What is the best way to draft an offer for a land contract?

In the typical Wisconsin residential land contract transaction, the owner of the property first enters into an offer to purchase with the buyer contingent on the seller agreeing to provide land contract financing. The key when drafting the offer to purchase for a land contract transaction is to have the parties agree on all of the terms and conditions that will be needed to complete the land contract document at closing. Land contract terms and conditions may be addressed in the Additional Provisions sections of the offer forms or in addenda. 

The offer might include a land contract rider specifying the terms of a land contract. The WRA Land Contract Rider, which is WRA form number WRA-LCR, spells out the terms the buyer wants in the land contract and may raise additional details the parties have not yet considered. An offer for a land contract may also be achieved by completing a Form 11 Land Contract, except for signatures, and using it as an addendum to the offer.

9. What is a “due on sale” clause? 

If the land contract seller has a mortgage on the property being sold and does not obtain the consent of the mortgage holder regarding the land contract sale, the “due on sale” clause in the mortgage may require the land contract seller to pay the total remaining balance due on the mortgage as soon as equitable title is transferred. Therefore, it is crucial for the seller to consult with the mortgage holder and obtain written consent to the land contract sale. Sellers with questions about this should be referred to their attorneys for legal advice!

10. Is a land contract recorded with the register of deeds?

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 transfer return will need to be filed.

11. Do land contracts affect the payment of commission? 

Because the seller in a land contract transaction is not receiving the full sales price upon execution of the land contract, there can be issues with commissions that may need to be worked out with the seller. The listing contract states, for instance, on lines 64-65 of the WB-3 Vacant Land Listing Contract, “Once earned, the Firm’s commission is due and payable in full at the earlier of closing or the date set for closing, even if the transaction does not close, unless otherwise agreed in writing.” The firm’s commission is earned if the seller “sells or accepts an offer which creates an enforceable contract for the sale of all or any part of the Property” at line 53 or if “a transaction occurs which causes an effective change in ownership or control of all or any part of the Property” at line 56. The closing for a land contract conveys the equitable ownership interest in the property, hopefully creates an enforceable contract for the sale of the property, and thus triggers the seller’s commission obligation. The execution and recording of a land contract also represents an effective change in ownership or control because the land contract buyer is treated as the owner while the seller is treated as the secured party.

If the buyer’s down payment under the land contract is not enough to pay the listing firm’s commission, the sellers and the listing firm can look for other solutions. For example, the sellers may offer to pay part of the commission after the terms of the land contract are fulfilled. If the listing firm agrees to the sellers’ proposal, this should be documented in an amendment to the listing contract. Sellers might also give the firm a promissory note for the remaining commission due. Other arrangements may also be made as long as the sellers and the listing firm agree, and they commit their agreement to writing. 

12. How is a land contract enforced? 

The parties to a land contract can negotiate their own remedy to end the land contract relationship. This typically will involve the buyer quitclaiming the property back to the seller. The seller first should confer with legal counsel to examine any liens that may have attached to the buyer’s interest in the property — it must be determined whether the liens will survive and continue to apply to the property if the buyer deeds it back to the seller. If the buyer has significant liens, the seller may choose to foreclose in order to remove the “hitchhiker” liens from title. 

The seller may declare the land contract to be at an end and file a quiet title action to remove the land contract as a cloud on the seller’s title to the property. This remedy generally is only used if the buyer’s equitable interest in the property is insignificant.

The seller can sue the buyer for the money owed and get a money judgment. The acceleration clause in the Wisconsin State Bar Form No. 11 Land Contract makes it possible for the seller to declare the entire outstanding balance to be immediately due and sue for the balance if the buyer defaults on just one installment payment. This remedy allows the seller to quickly obtain a money judgment against the buyer.

The seller also can sue for foreclosure by sale, usually called “specific performance.” This is similar to a mortgage foreclosure. The court establishes the redemption period in the foreclosure judgment. The court has a certain amount of discretion in fixing the redemption period, which may be as short as two months. If the buyer does not pay the balance, the sheriff sells the property at public sale. If the property does not bring in as much as the buyer owes, there may be a deficiency judgment against the buyer for the unpaid balance.

It may be more likely that a land contract seller will ask for a strict foreclosure. The seller who chooses this remedy has elected to rescind the contract, so he or she cannot get a deficiency judgment for the unpaid balance due on the contract. The seller gets his or her property back and keeps payments already made. There is no sheriff’s sale. Costs may be less than those for a mortgage foreclosure, and the time required to complete the strict foreclosure is usually less than for mortgage foreclosure.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA. 

March 2014 Legal Update , “Legislative Update 2014,” at www.wra.org/LU1403 .

“SAFE At Last: New law removes mortgage loan originator licensing requirements for sellers and REALTORS ® ” in the May 2014 Wisconsin Real Estate Magazine at www.wra.org/WREM/May14/Safe . 

January 2001 Legal Update , “Land Contract Financing,” at www.wra.org/LU0101 . 

July 2008 Legal Update , “Using Land Contracts and Leases with Options,” at www.wra.org/LU0807 . 

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Assignment of Land Contract cannot be used to avoid personal liability

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In Beauchamp v Schramm , an unpublished Michigan Court of Appeals opinion, the buyers on a land contract formed a corporation and assigned their buyer’s interest in the land contract to the corporation after the seller had declared a default and started land contract foreclosure proceedings.  The land contract permitted assignment.  The trial court dismissed the claims against the original buyers based upon the assignment.

The court of appeals reversed, finding that the assignment was made in bad faith with the intent to avoid personal liability for the deficiency upon sale of the property, likening the assignment to a fradulent conveyance under the Michigan version of the Uniform Fraudulent Conveyance Act.  The court reversed and remanded for a trial on the buyer’s liablity.

The interesting thing about the court’s opinion is that it raised the issue of the Uniform Fraudulent Conveyance Act without the issue having been raised or briefed by either party.

The issue could have been avoided entirely with appropriate drafting of the assignment clause.  Rather than simply providing that the contract could be assigned, the contract should have provided that it could be assigned, but that the buyers are not released from their liability under the contract without consent of the sellers.

General Principles of Assignments in Real Estate Transactions

Assume a seller, ABC Company, enters into a contract to sell a parcel of land (referred to here as “Blackacre”) to Ms. Green. Ms. Green subsequently assigns her interest in the contract to Mr. Smith. Such assignments of contracts of purchase and sale raise a number of practical issues—e.g. notice to the seller, payment for the assignment, and transfer of the deposit—that affect not only the seller but also the original purchaser and the eventual purchaser. A party wishing to assign its interest in a contract of purchase and sale to a new party should not assume that the matter is as simple as entering into an assignment with the new party and then walking away and forgetting about the contract.

A real estate contract will often contain provisions that limit or prohibit an assignment of a party’s interest in the contract. If the contract is silent as to the rights to the parties to assign their interests in the contract, then the rights of the parties, with few exceptions, can be assigned. Normally, assignments of contracts relating to the purchase and sale of real estate involve the purchaser assigning its interest in the contract; however, it is not unheard of to have the seller assign its interest in the contract.

In our scenario, to be binding on it as the seller, ABC Company must be given notice of the assignment, although it does not have to receive a copy of the assignment or the business terms relating to the assignment. If ABC Company has been given notice that Ms. Green’s interest in the contract has been assigned, it may be concerned that she is ‘flipping’ her interest in the contract for a profit. Consequently, ABC Company may wish to seek advice as to whether the contract is enforceable.

Assuming that Mr. Smith is paying Ms. Green a specified amount of money for the assignment, the question arises as to when this money will be paid. Ms. Green will want the money to be paid when they enter into the assignment but Mr. Smith will want to pay at the time that they complete the purchase and sale of Blackacre. In most cases, the latter time period is the norm but, in any case, money paid for an assignment is subject to the Goods and Services Tax.

Ms. Green will likely have paid a deposit to ABC Company pursuant to the contract and will want the deposit to be repaid to her at the time of the assignment rather than having to wait until the purchase and sale of Blackacre is completed. It would not be unusual for Mr. Smith to reimburse the deposit to Ms. Green at the time that they enter into the assignment.

Mr. Smith should look to obtain assurances by way of representations and warranties from Ms. Green that the contract to purchase Blackacre is in full force and effect and that her interest can be assigned to him. In turn, Ms. Green should look to obtain representations and warranties from Mr. Smith that he will fulfill her obligations to complete the purchase of Blackacre since an assignment will not release Ms. Green of her obligations under the contract unless such release is specifically provided for—and has been agreed to by ABC Company.

Frequently, and contrary to the scenario presented here, a contract for a real estate transaction will often limit the right of the purchaser to assign its interest in the contract. A common limitation is that “. . . the purchaser may only assign its interest in the contract with the consent of the seller, such consent not to be unreasonably withheld.” In most cases, it would not be unreasonable for the seller to insist that the assignee contract directly with the seller to fulfill the obligations of the assignor under the contract so that, if there is a default, the seller has the right to seek remedies against both the assignor and the assignee.

So long as all parties to a contract of purchase and sale are aware of their rights and obligations, the completion of a purchase and sale where a contract has been assigned can and should proceed in a straightforward manner.

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INSTALLMENT CONTRACTS by Amy Bullock, ATG Law Clerk

Introduction

An installment contract (also called a land contract or articles of agreement for warranty deed or contract for deed) is an agreement between a real estate seller and buyer, under which the buyer agrees to pay to the seller the purchase price plus interest in installments over a set period of time. Upon execution of the contract the buyer immediately takes possession, but the seller retains legal title to the property until the buyer pays the full purchase price. The seller delivers the deed to the buyer once the final payment is made. Installment contracts are an alternative to traditional mortgage financing and can benefit both the seller and buyer in a real estate transaction. This article is an overview of how installment contracts are created, what interest the parties to an installment contract hold, and how such contracts can be terminated.

What Is an Installment Contract?

An installment contract is an alternative to traditional mortgage financing. Under an installment contract, the buyer gets possession of the property and makes installment payments of the purchase price over an extended period of time to the seller, who conveys legal title to property once the purchase price is fully paid. 735 ILCS 5/15-1214; See also Shay v Penrose , 25 Ill 2d 447, 185 NE2d 218 (1962).

While the installment contract is a security device, it lacks many of the formalities and buyer protections included in mortgage laws. The majority of installment contracts include a forfeiture clause, which allows a seller, upon buyer's default, to end the contract, regain possession of the property, and keep all payments made by buyer. Compared to mortgage foreclosure, the seller can recover the property more quickly because he or she is not required to sell the property, observe notice and redemption rights, or file a court case. However, for a court to enforce forfeiture of an installment contract, the right of forfeiture must be expressly provided for in the contract. Hettermann v Weingart , 120 Ill App 3d 683, 689, 458 NE2d 616, 620, 76 Ill Dec 216, 220 (2nd D 1983). Also, when drafting the contract, a seller should be sure to include a time-is-of-essence clause. To prevent waiver of the clause, the seller should not accept late payments from the buyer. Kirkpatrick v Petreikis , 44 Ill App 3d 575, 577, 358 NE2d 679, 680, 3 Ill Dec 281, 282 (3rd D 1976).

An installment contract offers a buyer less protection than a traditional mortgage. This is true mainly because of forfeiture provisions, which give the buyer no right of redemption and allow a buyer to lose all interest in the property for even the slightest breach. Because of the possibility of inequitable results, courts generally look negatively upon forfeiture clauses, Id , and they will be strictly and narrowly construed. Bocchetta v McCourt , 115 Ill App 3d 297, 300, 450 NE2d 907, 909, 71 Ill Dec 219, 221 (1st D 1983). Therefore, the "party seeking to enforce the forfeiture has the burden of proving that the right to forfeiture clearly and unequivocally exists and that no injustice will result in its exercise." Id .

Fewer formalities and greater flexibility create advantages for both the seller and buyer to an installment contract. One benefit for a seller is the tax advantage of receiving installment payments over an extended period of time. See 26 USC § 453. Additionally, under an installment contract when a buyer defaults, a seller may not always bound by mortgage foreclosure laws but instead can recover possession more quickly and at less expense. Therefore, sellers under an installment contract may be more willing to sell to buyers who do not meet the qualifications of traditional lenders. Buyers also like installment contracts because under such agreements they generally pay a lower down payment and have lower closing costs.

How do Installment Contracts Work?

The interests of a seller and a buyer under an installment contract are determined by the doctrine of equitable conversion. "[E]quitable conversion is the treating of land as personalty and personalty as land under certain circumstances." Shay , 25 Ill 2d at 449, 185 NE2d at 219. The buyer holds equitable title once the contract is executed. The seller holds the legal title in trust for the buyer and the buyer holds the purchase money in trust for the seller. Once the contract is satisfied, the seller gives the buyer a deed, which vests legal title in the buyer from the date the contract was signed.

Equitable conversion gives the contract buyer a real property interest from the date the contract is signed. "[T]he buyer under a real estate installment contract is the owner for real estate tax purposes." Farmers State Bank v Neese , 281 Ill App 3d 98, 102, 665 NE2d 534, 536, 216 Ill Dec 474, 476 (4th D 1996). Over the duration of the contract, liens may attach to the equitable title of the buyer and the buyer may assign his or her equitable interest to a lending institution as security for a loan. See First Illinois National Bank v Hans , 143 Ill App 3d 1033, 1037, 493 NE2d 1171,1173, 98 Ill Dec 150, 152 (2nd D 1986).

Over the duration of the contract, liens may also be imposed upon the seller's interest in the property. For the buyer's protection, the installment contract should require the seller to convey marketable title at the completion of the contract. To ensure completion of the contract upon the death of the seller, the deed should be held in escrow for the duration of the contract. Unless there is a fixed time for delivery of a deed in the contract, the seller does not have to provide merchantable title to a buyer until the last payment is made. Tolbird v Howard , 101 Ill App 2d 236, 248, 242 NE2d 468, 474 (4th D 1968), rev'd on other grounds 43 Ill 2d 357, 253 NE2d 444 (1969).

Illinois law recognizes the doctrine of equitable conversion, except where the contract stipulates that no interest shall pass until the contract is satisfied. Ruva v Mente , 143 Ill 2d 257, 265, 157 Ill Dec 424, 428, 572 NE2d 888, 892 (1991). However, Indiana still holds that the buyer has equitable title upon execution of the contract, even if there is such a provision in the contract. See Kolley v Harris , 553 NE2d 164 (Ind Ct App 1990).

The buyer takes legal title free of any liens and encumbrances that attached to the seller's interest after the contract was executed, if the contract was recorded or the creditor had actual notice. Under Illinois law "[p]ossession of property is equivalent to the recording of a deed both as to subsequent purchasers and as to judgment creditors who claim interest in land of which another has possession when the judgment was secured." Beals v Cryer , 99 Ill App 3d 842, 844, 426 NE2d 253, 255, 55 Ill Dec 278, 280 (5th D 1981) ( citations omitted ). But possession must be open, visible, exclusive, and unambiguous in order for such possession to operate as notice of an unrecorded deed. Id . Therefore, recording the contract is the best way to ensure third parties are on notice of the buyer's interest in the property.

Seller Remedies against a Defaulting Buyer

An installment contract may be terminated in a variety of ways. Upon a buyer's default, a seller has available both statutory and common law remedies. Despite the similarities, courts generally do not view installment contracts as functionally equivalent to mortgages, and therefore installment contracts are usually not subject to mortgage laws. Therefore, it is generally easier for a seller to terminate an installment contract and recover possession of the property. When a buyer defaults upon an installment contract, a seller may elect to enforce the contract or to declare the contract at an end.

The seller can seek to enforce a contract in an action for specific performance or an action to recover the unpaid purchase price. However, such actions may not be helpful unless the defaulting buyers have the money necessary to complete the contract. The seller may also seek rescission of the installment contract, where the seller returns the payments made by buyer in exchange for the property and the fair rental value while the buyer was in possession. Rescission attempts to return the parties to the positions they were in prior to execution of the contract.

More common remedies allow the seller to terminate the installment contract upon the buyer's default. The seller must give the buyer a notice of intent to terminate the contract and request that buyer return possession of the premises. Once the buyer returns possession, the seller may need to file a quiet title action to remove the buyer's interest as a cloud on the title of the legal owner. See Dodge v Nieman , 150 Ill App 3d 857, 860, 502 NE2d 393, 395, 104 Ill Dec 130, 132 (1st D 1986); Shelt v Baker , 137 NE 74 (Ind Ct App 1922); and Kallenbach v Lake Publications, Inc , 30 Wis 2d 647, 651, 142 NW2d 212, 215 (1966). However, a seller can bring an action to quiet title only if the seller has possession of the property. Dodge v Nieman , 150 Ill App 3d at 860, 502 NE2d at 395, 104 Ill Dec at 132. If possession is not voluntarily relinquished, the seller may also file an action for ejectment or, in Illinois, an action for forcible entry and detainer. See 735 ILCS 5/9-101 and 5/6-101.

A seller may also declare forfeiture based on the terms of the installment contract. Historically, a forfeiture clause would allow installment sellers to forfeit the contract without notice, regain possession, and keep all money previously paid by the installment buyer. Even if the buyer had substantial equity in the property, it could be lost for even the smallest breach of the installment contract. Recognizing the unfairness of forfeiture clauses, judges and legislators have enacted certain protections for installment buyers. The following are statutory and common law protections for installment buyers established in Illinois, Indiana, and Wisconsin.

Illinois Illinois Mortgage Foreclosure Law requires foreclosure proceedings to terminate any residential real estate installment contract that was entered into on or after July 1, 1987, and extended over five years or more, when more than 20 percent of the purchase price has been paid by buyer. 735 ILCS 5/15-1106. Foreclosure grants the installment buyer the right of reinstatement (735 ILCS 5/15-1602) and the right of redemption (735 ILCS 5/15-1603). Despite the additional time and expense, foreclosure proceedings cut off all interests of third parties that attached to the property through the buyer.

Installment sellers may still elect to forfeit those installment contracts that fall outside the Illinois Mortgage Foreclosure Law. In order to declare a forfeiture the following conditions must exist: (1) "a valid contract containing a forfeiture clause," and (2) a buyer in actual default. Kirkpatrick , 44 Ill App 3d at 577, 358 at 680, 3 Ill Dec at 282. To exercise the forfeiture option, the seller must make a clear declaration of forfeiture to the buyer. Otherwise the duty to perform under the contract will not be extinguished. Bocchetta , 115 Ill App 3d at 299, 450 NE2d at 909, 71 Ill Dec at 221. Generally, the contract's forfeiture clause will provide the procedure the seller must follow to effectively forfeit the contract. These procedures must be strictly followed in order for a court to uphold forfeiture of the contract. Id . at 300-01, 450 NE2d at 910, 71 Ill Dec at 222.

To pursue a forfeiture, the seller should serve a Notice of Default and Intent to Declare Forfeiture upon the buyer and any lien holders with a lien recorded against the buyer's interest in the property. When the notice period has expired, the seller should deliver a Declaration of Forfeiture to the buyer and any lien holders with a lien recorded against the buyer's interest in the property. A seller should not accept a quitclaim deed from the buyer before the interest of any third parties has been extinguished.

Sellers in Illinois may also bring a forcible entry and detainer action to enforce a forfeiture clause. By statute, courts are given the discretion to stay enforcement of such an action for no more than 60 days from the date of judgment, during which time the buyer may redeem the property. 735 ILCS 5/9-110. When at least 25 percent of the original purchase price is paid, the courts are required to stay enforcement of the judgment for 180 days. Id .

Indiana There are no statutory limits on the seller's right to forfeiture, but Indiana courts will enforce forfeiture only "under circumstances in which it is found to be consonant with notions of fairness and justice under the law." Skendzel v Marshall , 261 Ind 226, 241, 301 NE2d 641, 650 (1973). There are two situations in which a forfeiture is appropriate in Indiana: (1) where there is an abandoning, absconding vendee; and (2) "where the vendee has paid a minimal amount on the contract at the time of default and seeks to retain possession while the seller is paying taxes, insurance, and other upkeep in order to preserve the premises." Id . at 240-01, 301 NE2d at 650.

Unlike Illinois, Indiana does not define how to determine if there is a "minimal amount" paid on a contract, which would preclude the seller from exercising the right of forfeiture. "Whether a particular sum paid toward a particular contract price is minimal depends upon the totality of the circumstances surrounding the contract and its performance." Johnson v Rutoskey , 472 NE2d 620, 626 (Ind Ct App 1984). While Indiana case law provides some guidelines, there is no set percentage of the contract price to be paid that precludes forfeiture. Where forfeiture is inappropriate the seller may foreclose pursuant to Trial Rule 69 (C), In State Trial P Rule 69(c) and the mortgage foreclosure statute, IC 32-8-16-1 (2000).

Wisconsin Under Wisconsin law, the majority of sellers elect to pursue the remedy of strict foreclosure. Like forfeiture, the remedy of strict foreclosure allows the seller to regain possession without providing the redemption rights to the defaulting purchaser. City of Milwaukee v Greenberg , 163 Wis 2d 28, 471 NW2d, 33. The remedy of strict foreclosure requires the buyer to pay the full amount of the unpaid contract price within the time set by the court. If the buyer fails to do so, the buyer's rights are terminated and the seller regains equitable title in the property. The court has complete discretion to determine the time in which the buyer may pay off the full purchase price. Westfair Corp v Kuelz , 90 Wis 2d 631, 636, 280 NW2d 364, 367 (Wis Ct App 1989).

At common law, installment contracts provided an alternative to third-party lending, which freed sellers from the complexities of traditional mortgage foreclosure. However, as courts and legislators have limited sellers' rights to forfeiture, the line between installment contracts and mortgages is being erased, and this simple alternative to traditional mortgage financing may no longer be so simple.

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Wisconsin Land Contracts – What They Are and How They Work

By Attorney Attorney Amanda N. Sacks , Schloemer Law Firm, S.C.

Under Wisconsin law, land contracts are a seller-financing alternative to a traditional mortgage.   Land contracts are often used for the sale of property to a family member.  We also see land contracts being used occasionally for the sale of vacant land.

While there are some obvious benefits to land contracts, both parties should be careful about entering into a land contract, so they don’t end up in a costly legal battle.  For example, a buyer can lose their entire investment if they default in their payments.  Or a seller can end up having to take back their property after a buyer has trashed the house for years and stopped paying on the land contract.

What is a land contract sale?

A land contract is a contract between a seller and a buyer, where the seller finances the transaction.  The buyer makes installment payments to the seller over time.

When is a land contract used?

Land contracts are typically used if a buyer has difficulty obtaining financing from a bank, if they do not have enough equity for a purchase, or if they are purchasing vacant land.  Often, a family member may wish to sell a property to a younger family member who may be unable to get financing from a bank.

What terms are included in a land contract?

Land contract terms are flexible and are based on whatever the seller and buyer agree on.  Terms include:

• Purchase price
• Down payment amount
• Interest rate
• Amortization period
• Balloon payment
• Prepayment rights
• Payment schedule

A land contract could be structured similar to a conventional mortgage with payments amortized and paid in equal installments over the term of the contract.  For example, on a $200,000 loan with no down-payment at 3% interest, the buyer would pay $843.21 each month for 30 years.

Or, the land contract can be amortized over a longer period, but have a balloon payment after a few years.  This allows the buyer some time to build their credit and refinance with a bank, and allows a seller to get paid off in a shorter period of time.  For example, on a $200,000 loan with no down-payment at 3% interest amortized over 30 years with a balloon payment after 3 years, the buyer would pay $843.21 each month for 3 years, and then pay a final balloon payment of $187,931.46.

What happens if the buyer stops paying the land contract?

The land contract will be secured by the property being sold.  If a buyer stops paying (i.e. defaults), the seller can pursue strict foreclosure.  In a strict foreclosure, the seller takes the property back, and keeps the amounts paid under the land contract.

While this can be beneficial to a seller, a seller should be careful in deciding to enter into a land contract, especially if the sale is to a nonfamily member and a bank is unwilling to provide financing.  If a bank sees loaning money to the buyer as being too risky, would you be comfortable loaning money to them?  If they stop paying, you can get the property back, but you will likely have to hire an attorney to do so.  And, if there are buildings on the property, the buyer may trash the buildings, and you are not guaranteed to get the property back in the same condition as you sold it.

Should a buyer enter into a land contract?

There are a couple of advantages for buyers:

• Potential lower down-payment.
• Flexible terms.
• Potentially lower interest rate than a bank.

There is one big disadvantage to land-contract financing for a buyer:

• Strict foreclosure. If a buyer defaults in payments, the seller can pursue strict foreclosure.  A buyer can lose the property back to the seller, and the seller may keep all amounts already paid towards the property.

Should a seller enter into a land contract?

For a seller, land contracts can offer several advantages:

• Easier to sell the property to those with low or moderate incomes, or no or poor credit history. For example, a land contract can help a family member sell a property to a younger family member who may not yet be in a position to obtain financing.
• Income stream with interest over the term of the land contract.
• Ability to pursue strict foreclosure if the buyer defaults, meaning the seller can reclaim the property and keep amounts already paid.
• Installment payments may be beneficial from a tax perspective.

However, don’t forget the disadvantages:

• Payment of purchase price is delayed.
• Seller may have to foreclose and take the property back, and the buyer may have damaged the property.

If you are thinking of buying or selling on a land contract, seek legal advice early in the process. If you have questions about this article, please contact one of our  real estate attorneys  at 262-334-3471 or email us at  [email protected] .

Originally published: March 7, 2022.

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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action.  If you need legal guidance, please contact us at 262-334-3471 or [email protected] .

Shannon Hext

Real Estate Law