Expert: John Hendricks - 10/11/2007

Question
My husband and I are moving out of state and are selling our home.  We have found a couple that would like to buy it but they cannot get a loan.  Can we sell on a land contract??  If not what are our options??

Answer
Dear Corin;

Thank you for your question regarding land contracts. Years ago, this form of a sale was a recognized form of selling a property. The seller would have a loan in place, usually with a great rate and terms and would sell to a buyer who would be unqualified to get a normal loan in a variety of areas. In the 1980’s it was to take advantage of lower interest rates in a high interest rate market. It may have been credit issues, as it may have been in your buyers case, lack of down payment, or any number of reasons. In past years though, the government created regulations preventing this type of transaction from occurring. The lending industry also has created language in current loan documentation that are signed by the buyers that prevent them from entering into land contracts or language to that effect. If the investor was to become aware of a land contract that has occurred, the loans ‘due on sale clause’ under the alienation clause in your loan would be triggered as described in the following definition and explanation.

“Land contracts are security agreements between a seller, known as a Vendor, and a buyer, known as a Vendee. The Vendor carries the financing for the Vendee, which may or may not contain an underlying loan. The basic difference between a land contract and a mortgage is the buyer does not receive a deed or clear title to the property until the land contract is paid off”.

Some states have laws that treat a land contract similar to a trust deed, and those land contracts provide for a trustee, giving a trustee "power of sale" to initiate foreclosure proceedings in the event the Vendee defaults on the power of sale" to initiate foreclosure proceedings in the event the Vendee defaults on the contract. Other states give buyers a longer period of redemption, similar to those under a mortgage. For these reasons, it is important to reduce the chances of default by qualifying the Vendee.

Also be aware of the Alienation Clause that maybe in your current loan. This is the language in a mortgage or trust deed that allows the lender to call the loan immediately due and payable in the event the owner sells the property or transfers title to the property. Almost every loan today contains an alienation clause, which means title cannot transfer and a buyer cannot purchase subject to an existing loan without triggering a due on sale clause.

I would recommend the following two suggestions…

1)   Before you were to enter into a land contract with the buyer in question, I would contact a real estate attorney who could advise you of the pros and cons of entering a contract so you can have all the knowledge you need to make a proper decision.
2)   The only way to really help the buyers is to carry a first deed of trust or whatever secured instrument is equivalent or used in the state that you reside. This means that you have the financial ability to carry the secured instrument on the home you are selling at an interest rate that is agreed upon by all parties for an agreed upon period of time.  If you were to do this, you may want to advertise your property with the seller carrying the loan. You may get a better qualified buyer, better interest rate and a higher price for your home based on your ability to carry the loan. I also recommend contacting an attorney to inform or do the research to satisfy yourself of the potential risks and benefits that would occur from your participation.

Obviously, depending on your location in the country, this market may be tough and you are looking for every opportunity that exists to sell your home. It seems like you do not have a real estate agent to work with at the moment. My final recommendation is to find the best Realtor in your community who can help guide you through the process of selling your home with a real estate community that will have qualified buyers for your home. If you have a difficult time locating a great Realtor, please do not hesitate to e-mail me your information and I will make sure that you get a seasoned Realtor that can answer all your questions. My e-mail is johnhendricks@marin1.com  They are experts in the field and may be able to advise you further at little or no cost. It is all built into the broker fee. Money well spent I might add…

I must let you know that I am a Realtor in the State of California and all states usually variety of differences in laws & regulations. I would highly recommend, as mentioned before to employ a real estate attorney to consult and review the suggestions that I have made to confirm the validity of comments made in relationship to your state if you were planning on selling yourself. If you use a Realtor, still review all recommendations for sound advice in the community you reside in. Thanks again and good luck.

Warmest Regards;
John Hendricks