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My land contract tenant abandoned the property. What can I do?

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Posted On: 01/19/2008

Q: I have a land contract. My tenant/buyer is supposed to pay $900 a month plus all utilities. They stopped paying rent and refused to return my calls. When I went to the property 20 days after the rent was due the doors and windows were wide open, so I called the police.

I just received a letter from my tenant’s lawyer that said they are not going to pay because of harassment. Also, the attorney said that I could buy out the tenant’s interest, and until this is resolved he will not pay me anything. The attorney also said they did some improvements to the property and that they would let their labor and money they spent go if I buy them out. Also they just filed their land contract with the county. What are my options? Do I have to foreclose since it is not a lease?

A: Let’s look at this one piece at a time.

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First, a land contract is an installment sale. The tenant/buyer pays an additional sum each month and does not receive title until some or all payments have been made. Unless the tenant has title, he has, at best, an equitable interest in the property. If the tenant does not have actual title, then what is there to foreclose?

Second, most rental agreements – and hopefully your land contract – provide that a tenant is not authorized to make improvements and that if improvements are made they automatically become “leasehold improvements” and property of the owner.

Third, a land contract is, well, a contract. Both parties have obligations. One of the core obligations of the tenant is to pay rent in full and on time. Making a late payment or no payment may allow the owner to seek damages and other remedies.

Fourth, typical land contract language provides that the tenant/buyer is making a bigger payment in exchange for the option to buy the property. If the tenant does not buy, then there is nothing to repay.

Fifth, if you have not heard from a tenant in 20 days and the door to the property is wide open you have good cause to call the police. You don’t know what happened to the tenants; they could need your help. As well, you now have a police report and witnesses to verify your account.

You will need a local real estate attorney to provide specific advice in this matter. Be aware that a number of states have strengthened rules for land contracts to assure that tenants get a fair opportunity to buy. That said, tenants have an obligation to pay their rent and appropriately maintain the property.

Q: I own a small house with another person. I would like to sell my half, but my co-owner does not want to buy me out. I have offered to sell my half at a huge discount, but she was not interested. Can I force the sale of the house? Can I force my co-owner to place her half of the house on the market along with mine?

A: It would be best if the co-owner would buy from you. However if that’s not the case you can seek a suit for “partition.” This means you go to a judge, the judge will see if the other party wants to buy you out and, if not, can require the sale of the property. When the property is sold, all liens and selling costs will be paid off and any remainder will be divided among the former owners. For specifics, speak with an attorney in the jurisdiction where the property is located.

Q: I bought a house in 1975 from a relative for $1. I’ve lived with my mother through the years and used the home I purchased as a vacation home. I’m selling this second home and making settlement this month. How do I find out the house value at that time to determine the capital gains. I assume $250,000 is tax exempt.

A: To qualify for the $250,000 residential capital gains write-off you need to have occupied the property for two of the past five years as a prime residence, thus it does not seem as though you have grounds for the write-off.

It might have helped your situation had you considered a tax-deferred exchange. Such a trade might have given you more income and depreciation than the current property, plus delayed any tax bill.

For specifics, see IRS Publications 527 “Residential Rental Property” and 544 “Sales and Other Dispositions of Assets” and speak with a tax professional.

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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