Owner financing occurs when the owner of real property agrees to accept payments directly from the buyer instead of receiving the purchase price in a lump sum from a lending institution. The buyer typically moves in immediately, but does not take title until he has completed all payments. This arrangement is commonly known as a land contract. Although South Carolina laws governing land contracts are similar to those of other states, they do contain distinctive features.
Mortgages and Liens
A buyer under a land contract takes title to the land subject to any preexisting mortgages or liens on the property. Consequently, the buyer should perform a title search at the county land records office before the contract is signed, and before he takes title to the property. If the property is subject to a recorded mortgage or lien at the time the seller transfers title, the buyer takes the property subject to it, but has a legal claim against the seller for damages. If the mortgage or lien is unrecorded, it will be extinguished when title passes to the buyer, although the mortgage or lien holder will still have an unsecured claim against the seller for the outstanding amount.
South Carolina offers fewer formal protections to buyers under land contracts than the laws of many other states. It allows land contracts to contain forfeiture provisions that entitle the seller to seize the property without foreclosing or paying compensation if the buyer defaults at any time during the installment payment period. This means that the buyer has no equity in the home until he takes legal title. Buyers and sellers are free to negotiate a more equitable arrangement in the land contract.
Because of the harsh consequences of forfeiture, a buyer who forfeits all payments in a land contract can appeal to a court of equity for relief. Although no statutory protections exist to help buyers who forfeit, the 2002 South Carolina case of Lewis v. Premium Inv. Corp. established that a South Carolina court has the right to force the seller to foreclose, sell the property at a judicial sale and return proceeds in excess of the buyer's outstanding debt to the buyer, thereby preserving buyer equity. It also established that a court may allow the buyer a second chance to own the property if he pays the new owner the amount of his outstanding debt within a certain redemption period set by the court. These remedies are granted by courts only if the facts of the case indicate that injustice would otherwise result.
After the buyer completes all payments, the seller is obligated to transfer title to the buyer. Most land contracts require the seller to provide "marketable title," meaning that there are no outstanding liens or mortgages on the property. If the seller fails to transfer title, or if he transfers title with a defect, such as an unpaid mortgage, the buyer may sue for relief. He may seek damages from the seller, such as the amount of an unpaid mortgage, or he may ask the court to order the county land records office to transfer title to the property to him.