Installment Sales Contracts

INSTALLMENT SALES CONTRACTS

Interests and rights 🏡 Legal form 🏡 Default and recourse 🏡 Usage guidelines

Interests and rights

An installment sale contract for deed is also called a land contract, a contract for deed, a conditional sales contract, and an agreement for deed. It is a bilateral agreement between a seller, the vendor, and a buyer, the vendee, in which the vendor defers receipt of some or all of the purchase price of a property over a specified period of time. During the period, the vendor retains legal title and the vendee acquires equitable title. The vendee takes possession of the property, makes stipulated payments of principal and interest to the vendor, and otherwise fulfills obligations as the contract requires. At the end of the period, the buyer pays the vendor the full purchase price and the vendor deeds legal title to the vendee.

Like an option, a contract for deed offers a means for a marginally qualified buyer to acquire property. In essence, the seller acts as lender, allowing the buyer to take possession and pay off the purchase price over time. A buyer may thus avoid conventional down payment and income requirements imposed by institutional lenders. During the contract period, the buyer can work to raise the necessary cash to complete the purchase or to qualify for a conventional mortgage.

A contract for deed serves two primary purposes for a seller. First, it facilitates a sale that might otherwise be impossible. Second, it may give the seller certain tax benefits. Since the seller is not liable for capital gains tax until the purchase price is received, the installment sale lowers the seller’s tax liability in the year of the sale.

Vendor’s rights and obligations. During the contract period, the seller may:

• 🟡  mortgage the property
• 🟡  sell or assign whatever interests he or she owns in the property toanother party
• 🟡  incur judgment liens against the propertyThe vendor, however, is bound to the obligations imposed by the contract for deed. In particular, the vendor may not breach the obligation to convey legal title to the vendee upon receipt of the total purchase price. In addition, the vendor remains liable for underlying mortgage loans.Vendee’s rights and obligations. During the contract period, the buyer may occupy, use, enjoy, and profit from the property, subject to the provisions of the written agreement. The vendee must make periodic payments of principal and interest and maintain the property. In addition, a vendee may have to pay property taxes and hazard insurance.

Legal form

Like other conveyance contracts, a contract for deed instrument identifies:

• 🟡  the principal parties
• 🟡  the property’s legal description
• 🟡  consideration: specifically what the parties promise to do
• 🟡  the terms of the sale
• 🟡  obligations for property maintenance
• 🟡  default and remedies
• 🟡  signatures and acknowledgmentThe contract specifies the vendee’s payments, payment deadlines, when the balance of the purchase price is due, and how the property may be used.Seller default. If the seller defaults, such as by failing to deliver the deed, the buyer may sue for specific performance, or for cancellation of the agreement and damages.Buyer default. If the buyer defaults, Florida provides foreclosure proceedings as a remedy.This kind of conveyance presents certain pitfalls for buyer and seller.One danger for the vendee is that the vendor has the power and the right to encumber the property in ways that may not be desirable for the buyer. For example, the seller could place a home equity loan on the property, then fail to make periodic payments. The bank could then foreclose on the vendor, thus jeopardizing the vendee’s eventual purchase.For the seller, the principal danger is that the buyer acquires possession in exchange for a minimal down payment. A buyer might damage or even vacate the property, leaving the seller to make repairs and retake possession. Further, since the contract is recorded, the seller must also bear the time and expense of clearing the title.If the buyer defaults, the seller’s only recourse to retake possession is to initiate foreclosure proceedings. Meanwhile, the seller can be held responsible for injuries or actions that occur on the property.To minimize risk, principal parties in a contract for deed should observe the following guidelines:

• 🟡  use an attorney to draft the agreement
• 🟡  adopt the standard forms, if available
• 🟡  become familiar with how the contract will be enforced
• 🟡  utilize professional escrow and title services
• 🟡  record the transaction properly
• 🟡  be prepared for the possible effect on existing financing