As everyone knows, interest rates have been rising, making financing a property through a lender more expensive for buyers. This is leading to shifts in the lending market, including the return of adjustable-rate mortgages and rate buydowns. In addition, some buyers and sellers are looking at land contracts as a way to address rising interest rates.

A land contract may be used when the seller finances the buyer’s purchase of the property. The buyer in a land contract 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.

What is a land contract? 

Land contracts are often what come to mind when a buyer and seller are considering seller financing. A land contract 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. 

How is equitable title different from legal title?

During the term of the contract, the purchaser has “equitable title” to the property and takes physical possession. Equitable title is the absolute right to obtain ownership when legal title is held in another’s name. 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.

Why would a buyer want to purchase property on a land contract?  

In the current market, the purchaser might be able to negotiate a lower interest rate than is available from a traditional lender. A land contract can attract buyers who face various obstacles in qualifying for traditional mortgage loan financing. Obstacles to financing could be credit issues, a small down payment or lack of credit history. 

Land contracts are also sometimes used when the buyer is related to the seller, such as parents selling the family farm or family cabin to an adult child on a land contract. 

Are there any regulations that would affect a seller offering seller financing?  

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 loan origination 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 and forms prepared by government agencies such as the FHA or VA.

In addition to the WB forms and forms prepared by government agencies, brokers can also use forms prepared and approved by the State Bar of Wisconsin, including deeds, mortgages and land contracts as well as out-of-state forms for out-of-state real estate and business transactions.

Is there a form for a land contract?  

The State Bar of Wisconsin has a standardized form of land contract known as a “Form 11 Land Contract.” Wisconsin-licensed brokers may use the State Bar forms, but salespeople cannot. 

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. Land contract terms and conditions may be addressed in the Additional Provisions sections of the offer forms or in addenda. 

How do the parties negotiate the terms of the land contract? 

The offer might include a land contract rider specifying the terms of a land contract. The WRA Land Contract Rider (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.

The WRA Forms Committee is in the process of revising the WRA’s Land Contract Rider, and the new and improved version should be available for agents to use in the very near future. 

Do any of these documents get recorded?  

The land contract is typically recorded with the register of deeds, giving notice of the vendee’s interest in the real estate and the vendor’s obligation to convey the real estate upon full payment. Failing to record a land contract puts the buyer at risk in that recording the land contract gives constructive notice to the public that the buyer has some type of interest in the property. If the parties do not record the land contract, a dishonest seller could sell the property out from under the buyer or use it as collateral for a debt.

What are some financial considerations a seller should think about before agreeing to a land contract?  

The seller is typically only going to receive the down payment from the buyer at closing. Out of that amount, the seller must consider what fees the seller will have to pay and whether the down payment is enough to cover such fees. The transfer fee is due at the time the land contract is recorded, along with a transfer return. 

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 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.

What if it doesn’t work out between the buyer and the seller?  

The parties to a land contract can negotiate their own remedy to end the land contract relationship. One possibility is for the buyer to walk away from the transaction and quitclaim the buyer’s interest 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 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 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 like 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 the seller cannot get a deficiency judgment for the unpaid balance due on the contract. The seller gets their 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.

Can all sellers offer seller financing such as a land contract?

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.