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Is Title Up in the Air with a Land Contract?

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Posted On: 08/04/2010

QUESTION:

I recently learned that the owner of the home I’m buying on a land contract is being foreclosed by his lender. What equity or rights against this action do I have as a land contract holder? Can I get my money back from the owner?

ANSWER:

A land contract – also known as a contract for deed or an agreement for sale – is an installment purchase. Instead of getting title now, you get title after a certain number of payments have been made or after all payments have been made.

Land contracts raise a number of complex issues. For instance, is the property financed? If yes, how is the debt being paid until you have title? Does the lender have the right to call the loan if it finds out about the land contract? If you miss one payment, do you lose your equity? If there’s a fire, who gets the insurance money? For that matter, who’s paying the insurance? So on and so forth.

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If you did not complete your obligations under the land contract then your payments might be considered nothing more than rent. But what if the seller does not meet the terms of the agreement?

You don’t actually have title to the property, but you at least have an “equitable” interest. The seller has an obligation to deliver title to the property, but if the property is foreclosed then what title can the seller provide? And if the owner is having financial troubles, how easy will it be to get your money back?

It’s possible that the owner will bring the loan current and the foreclosure will go away. However, if there is a foreclosure, then the owner might battle the lender by filing for bankruptcy. In that case, you’ll need to make a claim and fight other creditors for the owner’s remaining assets. For specifics, see an attorney in the state where the property is located.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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