How Does a Land Contract Work in Michigan?

Apr 17, 2022 | Real Estate Law

Buying or selling a property is one of the most critical decisions you’ll make. It involves a lot of expenses and may come with years of commitment. To make matters even more intimidating, you can buy or sell property using different options – all with their set of pros and cons. One such option is becoming more and more popular in Michigan, this option is using a land contract. This article will elaborate on the advantages and disadvantages of using a Michigan land contract.  

Table of Contents

Michigan Land Contract Laws

A land contract is an agreement between a buyer that intends to purchase a property and its seller. In a land contract, the seller does not grant the buyer full ownership of the property until all payments are made. Unlike mortgages, land contracts do not involve other third-party financial institutions. The buyer directly makes payments to the seller.

In Michigan, a land contract is an option for potential property buyers, especially those unable to secure traditional bank financing. Some fundamental laws behind Michigan land contract terms distinguish it from land contracts in other states.

A land contract in Michigan grants buyers an equitable title to gain immediate control over the property. However, the legal title remains with the property owner until the fulfillment of the land contract. Furthermore, the interest rates on land contracts in Michigan cannot exceed 11%. 

In case of payment defaults, the buyer must also be aware that one of these remedy options may be included in a land contract terms in Michigan:

Forfeiture

Infographic of the definition of forfeiture

A forfeiture clause is standard among land contracts. When a buyer fails to make regular payments or makes other breaches in the land contract, the seller has the right to forfeit the said contract. The seller must first serve a forfeiture notice to give the buyer the time to settle any due payments or other breaches made. If the violations are still not fixed after the specified date, the seller can file for forfeiture through the court.

With the forfeiture of the contract, the seller will be able to reclaim the property. Moreover, the seller does not need to reimburse all the payments made by the buyer.

Foreclosure

Infographic of the definition of foreclosure

Foreclosure is another remedy option for the seller when a buyer breaches a land contract. A land contract foreclosure is less common and more complicated than forfeiture. Furthermore, foreclosures are only allowed if an acceleration clause is included in the land contract. The acceleration clause will require the buyer to pay the due payments and the remaining balance of the land contract if an agreed-upon amount is missed.

Like the process of forfeiture, the seller will be required to serve a notice of acceleration, allowing a settlement between both parties if the past due payments are paid within a given period. If the payment issue is still unresolved, the seller can proceed with the foreclosure lawsuit. In Michigan, land contract foreclosure can only be done through the courts.

Land Contract vs Lease Option

A lease contract allows a tenant to use the property owned by a landlord for a fixed period. The tenant must be fully aware of the landlord and tenant laws and the terms provided by the landlord to avoid any conflicts within the duration of the lease. Common reasons for eviction include payment defaults, unrenewed leases, illegal drug activities, etc.

In Michigan, a lease with an option to buy is allowed. A lease with an option to buy is similar to a land contract. Both contracts do not involve any bank or financial institution purchasing a property. Instead, the private seller directly negotiates with the buyer and provides the contract terms. Furthermore, the buyer directly pays the seller with the agreed-upon payment conditions.

One of the key differences between a lease with an option to buy and a land contract is the eviction process due to unsettled payment issues or contract breaches. The redemption period could take months before a buyer is evicted from the property using land contracts. While in leases with the option to buy, it usually only takes ten days for the landlords to evict tenants. 

Land Contract Pros and Cons

While land contracts have benefits, there are also potential risks. Here are some advantages and disadvantages that both buyers and sellers must consider:

For sellers

Pros

In selling your property using a land contract, you have control over the contract’s terms and conditions, which allows you to set the buyer’s creditworthiness, the amount of down payment, and the regular payment conditions. You can also use the leverage of not having to pay the capital gains tax at once since the payment method is on an installment basis.

Another advantage of using land contracts in selling your property is the potential to have a more significant overall profit as you are allowed to charge interests up to 11%. Additionally, unlike managing a rental property, you can also enjoy having regular cash flow without being responsible for the maintenance of the property.

Cons

Upon fulfilling the land contract, you should transfer the property’s title to the buyer. You must also provide a deed declaring that the property is free of liens or mortgages. If you are unwilling to comply, the buyer may enforce legal actions, including filing for a quiet title, canceling a land contract, or seeking money damages.

For buyers

Pros

Buying a property using a land contract enables you to own a home without a mortgage. In a land contract, you will have to pay for a down payment and the remaining balance through installments within years. This payment structure allows you to start building equity in a property. Within the payment period, you can also improve your credit rating. When a balloon payment is agreed upon to be paid toward the end of the contract, you can then use your good credit rating to use traditional bank financing to pay the remaining amount.

Cons

There are also some disadvantages and risks in buying a property using a land contract. One of the disadvantages is being responsible for property maintenance. Since you own the equitable title, you will be in-charge in any repairs the property needs. Thus, we recommend that you thoroughly check the property first to assess the necessary repairs before signing the contract.

Breach of contract due to payment issues is another common risk for buyers. When you fail to pay regularly, the seller can take any legal remedies as stipulated in the contract signed by both parties. These remedies may include legal charges for breach of contract, land contract forfeiture, or land contract foreclosure.

Work With Our Experts Today

A well-crafted Michigan land contract must have provisions that consider the seller’s best interest. On the other hand, a buyer must also be aware of the conditions written in the contract before signing. Thus, seeking legal advice is best for both parties. We at Bowen Law can help you with this. Contact us here today.

DISCLAIMER:

The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only.

Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.

If you have legal questions, please contact us at: (231) 726-4484

Disclaimer:

The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only.

Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.

If you have legal questions, please contact us at:
(231) 726-4484

Muskegon Business Law Attorneys of David T. Bowen, P.C. pursue cases of Business Law, Real Estate, and Estate Planning in Muskegon Michigan

Copyright 2020 Bowen Law. All Rights Reserved | Sitemap