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Land Contracts:

Dos and Don’ts for the Title Agent

Homebuying has become challenging in some markets due to increased home prices, rising interest rates, challenging lending requirements, and for some, poor credit ratings. Despite this, the interest in owning a home has not abated, leading some to turn to a less common method of financing and conveying a home: The land contract.

Land contracts may be known by several names, depending on your region. These include installment contracts, contracts for deed, bond for title and others. The terminology used is nearly as variable as the possible structures for land contracts.

At the core, a land contract is an agreement between the seller of a property and the buyer, in which the seller agrees to finance the buyer for a term of years, and the buyer typically takes immediate possession. At the end of the term, if all monies have been paid successfully to the seller, a deed from the seller to the buyer is recorded.

Because these are typically agreements by parties not experienced in real estate transactions, the form of the land contract can be inconsistent, making insuring difficult. Doma Title Insurance is here to assist our agents in developing requirements when a transaction involves the consummation of a land contract, or how to clear a failed land contract.

Land Contract 101

As noted above, terms within a land contract can vary greatly. A land contract must include basic terms to be considered an enforceable contract. These include identification of the land, the seller/financer, the buyer, the amount of purchase, the payment terms and the length of time the contract is to be in effect. If any of these elements are missing, the enforceability of the land contract may be called into question.

It is common to see a land contract that involves a balloon payment at the end of the contract term. These are frequently used to allow the buyer time to build their credit, or to see if interest rates fall, before seeking traditional financing. Once traditional financing is obtained, the deed into the buyer will be recorded. If the buyer is unable to make the final balloon payment, the contract may fail, or the contract may be extended by further agreement of the parties.

A land contract may involve an existing mortgage on the property. In such a case, the land contract becomes more akin to a wrap-around mortgage. The buyer pays installments to the seller, while the seller continues to pay the existing mortgage. This increases the risk to the buyer, who may lose the property if the seller fails to make the mortgage payments, even though the buyer has timely paid their payments. 

Title Risks

The most significant title risk in a land contract arrangement is the interest in the title. If the contract is pending, record title is likely still in the name of the seller, but the buyer can have an equitable interest, depending on the amounts paid, the terms of the contract and local law. In the case of a failed land contract, investigation into how much of the contract was completed is critical, and failing to do so may result in a costly title claim.

If an uncompleted land contract is not properly eliminated, this leaves the door open for the failed buyer to seek recovery of monies paid or even specific performance of the contract. It is important to not dismiss a land contract in a back chain of title, but instead confirm it was resolved, or require resolution of this potential cloud on title.

Land contract claims may also arise from foreclosure. If the seller continued to maintain a mortgage, but failed to pay, the original lender will foreclose. Because land contracts are not always recorded, it could be missed in a foreclosure. If the foreclosure does not address the buyer’s interest, that buyer’s interest could survive the foreclosure, creating a cloud on title, and open the door to significant litigation costs.

Best Practices for Insuring

Most often, an agent will be asked to insure a chain of title that includes one of two scenarios:

  • The land contract has been completed, and the deed into the buyer needs to be recorded; or
  • The contract failed, and the seller is seeking to convey title to a new buyer.

Once the deed from the seller is recorded, the land contract is complete. If the agent is asked to insure the buyer at the completion of the land contract, agents may proceed as they would in a typical purchase transaction. Often, we see the land contract being completed without the benefit of title insurance, and the buyer comes back later to the title agents seeking to sell to a new party or secure an Owner’s policy. Since no title search or examination was completed previously, an agent will need to not only list the current seller and the new buyer, but also the original seller under the terms of the land contract.

Failed Land Contracts

A failed land contract is frequently complicated by frustrated or missing parties. The land contract buyer’s interest must still be addressed before the new sale can be insured. A quitclaim deed from the buyer under the original land contract is typically the easiest resolution. Such a deed would also address any equitable interest the original buyer may hold in the property.

If the land contract buyer is unavailable or unwilling to provide a deed, a court action may be required to formally terminate the contract. This may be in the form of a foreclosure or in the form of a quiet title action. Doma underwriting counsel assists their agents regarding the proper requirements to raise in such a requirement on your commitment to insure. 

While rare, you may be asked to insure at the start of a land contract. While this may be possible, we recommend Doma agents work closely with their Doma underwriting counsel in this case.

It is important to note that if a client seeks advice on how to structure a land contract, this is outside the scope of a title insurance agent’s permissible activities. Please always refer a client to their personal real estate counsel in this case, to avoid any unauthorized practice of law concerns.

Land contracts are a valuable real estate tool, especially in a market where new buyers are challenged to find properties they can immediately occupy. What is permitted and required and how a land contract may be cleared are all subject to local law. Doma agents are recommended to work closely their underwriting counsel to make sure all state-specific requirements are properly addressed. Please contact your Doma underwriting counsel at [STATE][email protected].