What is a land contract?
A land contract is an alternative form of financing in which a contract is formed between a buyer and seller of real property where the sellers provides the buyer financing. Land contracts best serve those who have trouble qualifying for a mortgage, but they still must regularly pay the seller. The property title is then transferred to the buyer once they’ve paid off their debt. Land contracts may sound favorable, but they have less protections for both buyers and sellers alike. In this article, we’ll learn more about how land contracts are designed, the risks involved such contracts, and Michigan’s’ land contract rules.
How a Land Contract is Designed
Land contracts are designed so that the buyer places a down payment between 10% and 20%. The buyer and seller can negotiate not only monthly rates, but also interest rates. In Michigan, interest rates can’t be above 11%. Some buyers will also agree to making a balloon payment, or large one-time payment at the end of the loan term. The idea behind land contracts is that buyers can clean up their credit to eventually obtain traditional financing; however, this isn’t always the case. If a buyer is unable to make their Michigan land contract payments, the seller can take action in a variety of ways. Options for the seller include forfeiting the contract or foreclosing, which come with their own rules and processes.
Michigan Land Contract Risks
Not only are there risks for the buyer, as mentioned above, but the seller should also be wary. One common issue with land contracts is when the seller is still paying off a mortgage. If the seller defaults, it’s up to the buyer to see if they can work out issues with the lender, lest they lose the property. They may still lose the property if the lender is able to demand immediate payments. Another issue involves the buyer breaching contract.
What are land contract rules in Michigan?
Michigan doesn’t have a standardized land contract form. The Michigan Foreclosure Task Force suggests having a well-crafted land contract that includes all payment terms, a provision that gives the buyer possession of the property, and provisions that indicated the buyer received a title insurance policy that covers the property.
Do I Need a Real Estate Attorney?
A real estate attorney is a valuable asset when it comes to land contracts. The reason being is a real estate attorney has your best interest in mind and can assist with reading the contract and bettering your understanding of terms related to the transaction. Doing so may prevent disputes from occurring later on, or prevent you from signing a contract that may harm you in the end.
Land Contracts are useful forms of financing for those that intend to fix their credit, but, like with any transaction, there’s a certain level of risk. This risk not only pertains to the buyer, but also the seller. Knowing Michigan’s land contract rules is imperative to having a smooth transaction. For any questions regarding land contracts in Michigan, contact a real estate attorney in Muskegon, Michigan.