What Does a Land Contract Entail?
A Land Contract is a method for financing the purchase of real estate in Wisconsin. It can be used to buy any type of property in Wisconsin, including single family homes, duplexes, small apartment buildings, commercial properties, farms, and other types of real estate. The term "contract" is not strictly correct because it does not refer to a written agreement between a buyer and a seller. For example, a real estate contract does not generally bind the seller to sell the property , only the buyer to buy. A land contract generally may actually bind both the seller and the buyer. The buyer acquires an interest in the property that protects him or her from the seller’s creditors.
Land contracts work differently than traditional real estate transactions because they are seller-financed transactions. The buyer agrees to pay a certain amount of money over a specified period of time (usually five to thirty years). The buyer makes the payments directly to the seller on whatever payment schedule the parties have agreed upon. Once the buyer has made all of the payments, the seller transfers the property to the buyer by delivering a deed to the buyer. The seller pays no real estate commissions, so the buyer should expect to pay a higher purchase price. We can draft the land contract to require the seller to pay a real estate commission. This will be an adjustment to the purchase price.
The Legal Formalities Required for Land Contracts in Wisconsin
The legal requirements of a land contract in Wisconsin, are as follows: You have to follow the laws on mortgages (Section 708.10-16, Wis.Stats.), even though your land contract is not a mortgage. You have to follow the law on contracts for deed (Section 842.10, Wis.Stats.), but you are not limited to that section of the statutes. The statute on the law of contracts for deed is very limited, and does not say what must be contained in such an agreement.
You should include in your land contract: the date of signing; the names and address of all parties; if there are any special considerations, i.e., if you are trading property for property, include a valuation of the property to make it easier to divide the down-payment between you; if you leave payments blank, it will look like there is no consideration, and the Court will throw it out.
Date of closing of the contract; closing is the final signing, when money changes hands without further negotiation. Describe the legal description, volume and page number of the plat map, now "Section number, Town and Range". Tell what easements are necessary. What title insurance is obtaining, and what additional exceptions there will be to the title insurance. (Title insurance is important if the buyer is taking over the mortgage.)
What the down payment is. What the principal paydowns will be year by year. When the interest will be paid, when the principal will start being paid, when the last payment is due, and whether interest will be compounded. Where the payment is to be mailed, and how much per month, how much per year, or whatever it is. Tell where the buyer may make the payment: either at the attorney’s office, or at the seller’s house. State what happens with the itemized list of improvements. Recapture interest if the property is sold within 2 years is standard.
The deed will be delivered by a title company if you are getting a loan. If not, you may want to use a title company. You could put in the contract, "To be delivered at closing." Title company will record the deed; mortgage to be secured by a properly executed mortgage, mortgage will be recorded before the deed is recorded. What the deed contains: full warranty, except "as is", which means – no warranties. Covenants of seizin, freedom from encumbrances, quiet possession and warranty. Non-disturbance provisions for leases.
What happens upon default; borrower pays all costs; when borrower goes bankrupt, borrower agrees to pay deficiency judgment, consent to judgment, and waiver of homestead provisions. Give the purchaser a reasonable time to fix the defect or remedy the situation. Possession of property passes to mortgagor. That includes rent, sales price, installments and promissory notes. Another provision to think about is if it is a homestead, do you want to have first right of refusal to buy the property?
Positive Aspects of Utilizing Land Contracts
Land contracts offer various benefits for both buyers and sellers. Individuals who have bad credit, do not qualify for traditional financing, or cannot afford the closing costs associated with traditional sales but are otherwise financially capable of home ownership will likely benefit from a land contract. Land contracts are also beneficial for sellers like landlords who want to sell their under-performing investment properties quickly and for cash flow. The primary advantage for a seller is the ability to maintain control over the property under the contract as it operates as a deed in trust. It also allows sellers to retain control over the paperwork for making a sale to a buyer with poor credit, who would likely be denied in an effort to protect lenders from losing money if the buyer defaults on a loan. This can allow both the seller and the buyer to avoid spending thousands of dollars obtaining a mortgage loan.
Caveats and Considerations
In addition to the benefits, there are also risks and drawbacks to parties of a land contract. Understanding these issues is important because it could effect how the land contract is ultimately enforced.
The first potential risk with a land contract is that the buyer is not able to pay off the promissory note in full or cannot pay the property taxes. In such instances, a foreclosure on the new land contract will void the buyer’s interest, but will not affect the seller’s interest unless they are still under the impression that the buyer is paying. The second issue is that the seller may not guarantee that the buyer has informed the IRS that the income received from the land contract is taxable. Additionally, the seller may not realize the IRS taxes limited liability companies and corporations as corporations rather than pass-through entities, and this could lead to the loss of business. The last major risk is that the seller may have problems with their own personal finances. If the seller legally severs the land contract, he or she may end up legally entitled to damages from the buyer. However, the seller may also have to pay attorney fees and additional court costs that he or she may not have considered in the initial agreement. Because of these potential drawbacks, it is always best to consult with an experienced attorney to sort through the details of a land contract.
Practical Steps for Effectively Managing a Land Contract
A land contract is essentially a deed with a note attached. Deeds are not usually associated with a promissory note, while a land contract delivers real estate in exchange for a promise to pay. It is a hybrid between a sale and mortgage and is commonly used when the buyer cannot afford a traditional mortgage. Here are the steps necessary to create and execute a land contract:
- Negotiating. Complete negotiation of the parties to the land contract so that the terms are agreed to by all. Be certain each party understands the key provisions of the land contract. Ideal terms would allow the buyer to make principal reduction payments without penalty.
- Drafting. Draft the land contract. Before a land contract becomes legally binding, the parties must know that it contains all necessary elements. To be binding, the land contract must contain the legal names of the parties; the legal description of the land; the purchase price; and the terms of the agreement, including information about interest rate, taxes, possession, insurance, and maintenance of the property . Other legal defenses created but not specifically addressing provisions in the land contract must also be included in the land contract.
- Execution. The parties must sign the land contract. At this point, the land contract becomes legally binding. The executor may wish to provide a third party with a copy. It is often a good idea to record the land contract in the deed records if the seller financing the land contract is still serving as titleholder. Being a titleholder, once the seller transfers possession to the purchaser and postpones their rights to possess the property, he loses the ability to assert title and a land contract is sufficient to substitute a conventional deed.
This is a commercial transaction and is not the same as lending money to a friend. If you attempt to write your own land contract, you should consult with an attorney.
Resolving Disputes within the Framework of a Land Contract
Disputes between land installment contract vendors and vendees are most often resolved in one of three ways: mediation, arbitration or litigation. If the parties to the land contract have decided to utilize arbitration, the arbitration proceedings will occur according to the rules of the American Arbitration Association (or similar arbitration agency), unless the parties have chosen an alternative. The decision of the arbitrator(s) is usually final and binding in a similar manner to the judgment by a trial court.
If the land contract does not contain an arbitration clause, the resolution of a land contract dispute will likely take place by a traditional judgment entered by a state court judge. Prior to litigation, the parties may be required to pursue a pre-filing conference and/or mediation (excluding those situations in which the parties are protected against other party control over the process). At the pre-filing conference, a judge will typically outline the actions required prior to filing a complaint. In addition, the judge may set a deadline for filing the litigation in court, encourage the parties to engage in discovery, identify issues that may require the intervention of the court, and provide the parties with a deadline for written submissions to the court on the merits of the case. Mediation may occur at some point, whether prior to or after litigation begins and may occur with or without a judge.
Regardless of how a dispute is initially resolved, either through litigation or arbitration, a party dissatisfied by the result may appeal the decision to a higher court, with appellate court review proceeding in a manner similar to those appeals in other civil matters.
Land Contract Case Studies and Precedents
To better understand the practical application of land contracts for deeds in Wisconsin, consider the following hypothetical scenarios: For example, suppose a Seller puts his house on the market to have a fresh start. He looks at the market and finds he will be lucky to sell his home for $100,000 cash. Of course, he still owes his lender another $70,000. He is willing to "sell" his home on a Land Contract, but is not willing to do so for $100,000. So he reaches out to a local "trade association" to find out what the local rates are for the type of home he owns with the condition it is sold on Land Contract. His home improves to $120,000 because of what other sellers are receiving for like-kind property. Or suppose another Seller puts his house on the market to have a fresh start. He finds a buyer interested in buying the home, but he wants financing to be done through the registry. So the buyer goes after conventional financing like a conventional mortgage. Once the Buyer contacts a bank or lender – no one shows up for an open house, no one comes to visit. The Seller has a strict purchase and sale agreement with the Buyer. The Seller has been forced to drop the price of his home and will still need to sell his home for $96,000 to pay off the mortgage and other fees. His home sells for $90,000 as, this Buyer, wants a credit to replace all his kitchen cabinets.
Now, let’s look at the same homes if they were sold on the Land Contract.
For example, the same Seller who lowered his purchase price onto the open market for $100,000 finds the same Buyer. The Buyer agrees to buy the home on the land contract for deed and pays the higher rate of $120,000 as the regular lender rates at the time mean that it would cost the Buyer more and the Seller would not need to retrofit his home to sell under a land contract for deed. Or take another Seller who wants to have a fresh start and now receives a higher than average offer of $150,000 on his home, the condition is that the Seller has to finance the home himself on a land contract for a number of years until the interest rates go down and the buyer has repaid $90,000 of the principal then the Buyer now goes to a lender for the additional $60,000 to pay the Seller the remaining balance. The money in question is the difference between that a bank would have lent today under the same terms as the Buyer’s financial situation is now considered acceptable for a loan. The parties would have been able to work out their purchase and sale agreement with no change as the price may have been higher in the end because the rates on a land contract for deed are not as high as those for a conventional mortgage and carrying costs were lower and the Seller did not have to incur the cost of redoing the kitchen cabinets as was his intent.
The Future of Real Estate Contracts in the Wisconsin Market
As we move further into the 21st century, the landscape of real estate transactions continues to evolve, and with it, the use of land contracts. Looking ahead, there are several trends that may shape how buyers and sellers engage in these agreements in the years to come.
One notable potential trend is the increased use of digital platforms for handling land contracts. With the rise of e-commerce and online marketplaces in virtually every aspect of our lives, it is not hard to imagine the emergence of online land contract platforms. These platforms could connect buyers and sellers while increasing transparency, thereby reducing the risks associated with miscommunication in face-to-face negotiations.
Another key trend to consider is the growing popularity of "green living" concepts. Today’s homebuyers are more environmentally conscious and demand energy-efficient, sustainable homes. This could potentially lead to changes in land contract stipulations that cater to these demands , such as provisions for energy audits or the inclusion of renewable energy sources.
Additionally, given the rapid technological developments in home security and management, we might expect future land contracts to incorporate smart home technology as part of a sale. Such technology could be subject to ongoing monitoring agreements between the parties, which would provide additional data on the property’s condition and help to manage risks associated with mold, water intrusion, and other issues.
Finally, as housing affordability becomes an increasingly pressing concern, land contracts may play a critical role in helping buyers traverse the financial landscape. No longer a product limited to the "subprime" elephant in the room, land contracts can serve as a viable alternative for individuals and families who have difficulty qualifying for conventional mortgage options, making homeownership more accessible.