During tough economic times when borrowing requirements are raised, property owners, desperate to sell, will often sell using an installment land contract.
This blog provides a few basic things to know before entering into an installment land contract.
First, an installment land contract is the same as a real estate installment contract, which is the same as an agreement for deed. Three terms, one concept, hereinafter referred to as a contract.
A contract works much like a mortgage. That is, the buyer takes possession of the property while making payments on the purchase price. However, instead of making payments to a mortgagee, he makes payments to the seller.
There is usually a down payment made on the property and payments are usually spread out over sixty (60) months. The payment typically includes the payment of principal, interest, real estate taxes, and insurance. However, it can be interest only. The seller typically escrows the payments for real estate taxes and insurance so that when the payment on the taxes and insurance are due, the seller has the buyer’s money to pay them. Though it is not unusual for the buyer to be responsible to pay the real estate taxes and insurance. At the end of the sixty (60) months, in theory, the buyer now qualifies for a traditional mortgage and applies for same and pays off the purchase price.
It is not until the buyer pays off the purchase price, that there is a second closing at which time the seller issues the buyer the deed. Note, the buyer does not receive the deed to the property until the buyer has paid for the property. This is unlike a typical sale where the buyer receives the deed while still making payments to the mortgage company.
The real fun begins when the buyer falls behind in payments. This includes not only the monthly installment payments to the seller, but the payment of real estate taxes or insurance if they are the buyer’s responsibility. Once the buyer falls behind in payments, Illinois law provides the seller with an expedited proceeding to get the property back.
When the installment contract is for sixty (60) months or less, or when eighty percent (80%) or more of the original purchase price remains due, the seller can use the provisions of the Illinois Forcible Entry and Detainer Act. A complaint in forcible entry and detainer is what is commonly known as an eviction proceeding.
Before beginning the eviction proceeding, the seller is required to give notice of at least thirty (30) days to the defaulting buyer and give the buyer the opportunity to cure the default. Usually the buyer must become current in the payments, including real estate taxes and insurance. If within thirty (30) days the buyer has not cured the default, the seller can file an eviction proceeding. The Forcible Entry and Detainer Act allows the judge to stay enforcement of the order of possession for up to sixty (60) days during which time the buyer can cure the default. The court can stay enforcement for one hundred eighty (180) days if the amount unpaid on the contract is less than seventy-five percent (75%) of the original purchase price. If the default is cured, then the judgment is vacated and the real estate installment contract reinstated. If the default is not cured then the seller gets possession of the property.
It is the practice of most judges to grant the buyer the full sixty (60) days or one hundred eighty (180) days, even when there is a minimum likelihood that the buyer can become current. Therefore, the seller can expect the buyer to live in the property for free for at least ninety (90) days.
It is important to know that in order to seek possession of the property, the seller must declare the contract forfeited. This means the seller in the eviction proceeding receives nothing back but the property, plus court costs and attorney fees, if the contract provides for attorney fees. Any money due the seller under the contract, including real estate taxes and insurance, is not recoverable. Therefore, it behooves the seller to begin the eviction process as soon as the buyer falls behind in payments.
If the contract provides, the seller can sue the buyer for the money owed. However, if the buyer had the money, it is very likely that they would have paid it to the seller. Thus, it is virtually certain that the best remedy for seller is to get the property back and on the market as soon as possible.
For the buyer, the default means you have lost all the money you paid with respect to the property, including the cost of repairs and improvements to the property.
Note, however, for real estate contracts with a term greater than sixty (60) months and where the buyer has paid at least twenty percent (20%) of the original purchase price, the seller must use Illinois Mortgage Foreclosure Law to obtain possession of the property. Using the Illinois Mortgage Foreclosure Law to obtain possession, if the buyer contests the foreclosure, the seller can expect it to take at least a year to obtain possession after filing suit.
The foregoing are just a few of the issues to be aware of before signing an installment land contract. Obviously it is recommended you talk to an attorney before signing the contract to discuss all the issues.