Installment land contracts, also known as contract for deed, is a variety of real estate owner financing that permits a buyer and seller to skip the bank approval process and work directly with each other. Land contracts are a common way to buy and sell property in the state of Michigan, and while every land contract can vary due to the flexible nature of the deal, there are commonalities that every party should expect.
The typical land contract, in Michigan and elsewhere, calls for the vendor to hold the deed in his own name as collateral while he temporarily finances the purchase for the vendee. The vendor usually wants a 30-year loan, with a balloon payment due after five or 10 years. They agree on a price, interest rate and down payment, which is small on average and ranges from 1 to 10 percent. The vendee also agrees to maintain the property and perform necessary repairs, as well as pay property taxes and insurance. Deals are recorded with the county recorder of deeds.
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Payments and Taxes
Average Michigan land contract terms call for a 30-year amortization that requires the vendee to pay the entire balance due after the vendor-finance period ends. This is usually accomplished via vendee refinancing. The payments that the vendee makes during the term accumulate an equitable share for her; that equity is used to refinance to a bank loan, and the vendor is paid in full. When that occurs, the vendor transfers the title to the vendee.
When Things Go Wrong: Forfeiture
If the vendee defaults, Michigan allows the vendor the rights of forfeiture, provided that the clause is written into the sale contract. Forfeiture allows the vendee to simply return the property to the vendor if he falls behind on payments and cannot make them up. The vendee has either 90 or 180 days to cure the default, depending on the amount of money she has paid into the contract. If she cannot cure the default, the property is returned to the vendor and the vendor keeps the payments made as liquidated damages.
When Things Go Wrong: Foreclosure
Michigan also provides vendors the right to foreclose non-judicially if the sale contract contains a power of sale clause. This means that the vendor doesn't have to go through the court system to reclaim the house. The vendor may also foreclose judicially under Michigan law, but it's slower and more expensive. The big difference between forfeiture and foreclosure is that in forfeiture, the vendee can become current by just paying the past-due balance (and can then remain in the property, provided she stays current). Foreclosure accelerates the full balance due; and in addition, may force the vendee to be liable for any deficiency that's not satisfied by the sale of the property.
Michigan also provides protections for the vendees in case the vendor isn't able to deliver a clear title upon satisfaction of the contract (meaning, the vendee pays the vendor in full). The vendee can secure a court order that directs the vendor to deliver the deed. The vendee can also cancel the land contract, and demand the return of all monies paid into the property. Finally, the vendee can seek additional money damages.