Foreclosure is a legal remedy that brings an end to an interest in land. A land contract, also known as a contract for deed, is one such interest, despite the fact that the buyer does not have full legal title to the property. Under a land contract, the buyer occupies the property and pays the purchase price in monthly installments. The seller retains legal title to the property and effectively acts as the buyer's mortgagor. Like any other lender, the seller can commence foreclosure proceedings if the buyer defaults.
Under a land contract, the buyer takes immediate possession of the property but legal title to it remains with the seller until the buyer pays the contract price and any interest on it in full. The arrangement is a hybrid between a sale and a mortgage. If the buyer defaults, the seller has contract- and mortgage-type remedies available to him. The contract remedy is typically "specific performance." This obligates the buyer to specifically perform his obligations under the contract, that is, to pay the price and accept transfer of title. The problem with this is that if the buyer is in default, he is unlikely to be able to pay the contract installments. The seller must then look to evict him, and reclaim his property or the outstanding balance of his loan.
Foreclosure requires an order of the county court, called a judgment of sale. The buyer has the opportunity to defend foreclosure proceedings. This typically requires him to pay all money due under the land contract. Once a judgment of sale is entered, the property is sold by sheriff's sale to the highest bidder. According to Michigan law firm Wenzel, Bennett and Kowalski, the seller can bid for the property, and is frequently the only bidder. If the seller wins the bid, he will only pay the sales price above the judgment debt. If not, he will receive the proceeds of sale.
Effect of Foreclosure
When a seller commences foreclosure proceedings, the entire amount payable under the land contract accelerates, or becomes due. The buyer can avoid foreclosure by paying the balance of the price, together with interest and penalties. Even after a judgment of sale is entered, the original buyer has a second chance to reclaim the property. Title to the home does not pass for a period of time, typically six months, after the sheriff's sale. If the buyer pays the entire contract money plus costs within this redemption period, he can take full legal title to the home. The original seller receives the debt plus costs. If the original buyer does not redeem, and assuming that the original seller is the highest bidder, title is transferred back to the seller at the end of the redemption period.
Contract forfeiture is an alternative to foreclosure. It is available as soon as the buyer is in arrears. If the buyer does not settle the arrears, together with costs and interest, the contract is simply returned to the seller. Forfeiture action is quicker and cheaper than foreclosure and, unlike foreclosure, does not result in a property sale. However, forfeiture does not accelerate the payments due under a land contract. A buyer can avoid it simply by paying the installments due to date. According to the Federal Reserve Bank of Minneapolis, courts are becoming increasingly sympathetic to the plight of buyers left homeless by contract forfeiture, and are likely to intervene if the buyer has already paid a large proportion of the purchase price. Some states recognize only foreclosure as the appropriate remedy.
- State Bar of Michigan: Land Contracts
- Wenzel, Bennett and Kowlaski: Land Contracts - Foreclosure versus Forfeiture
- Federal Bank of Minneapolis: Risks and realities of the contract for deed
- Griffith Law Group: Foreclosing on a Land Contract
- California Association of Realtors. "Contingency for Sale of Buyer's Property." Accessed June 1, 2020.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.