Posted by Redline on March 16, 1999 at 20:58:40:
I thought I was the ONLY one who didn’t know what Bill was talking about half the time! 
RL
One Man’s Opinion: Pitfalls of Land Contracts Article (LONG) - Posted by Stacy (AZ)
Posted by Stacy (AZ) on March 16, 1999 at 12:36:34:
I’m posting the following article NOT to disuade the use of Land Contracts. I’ve never used them, and am in the process of learning all I can before I do. I think there are others on this board that may be interested in various opinions regarding their use. Best to be aware of issues surrounding their use.
Stacy (AZ)
Pitfalls of Installment Land Contracts
by Jonathan A. Goodman, Esq.
What are the pitfalls of structuring a seller-financed transaction through an installment land contract?
Though the Real Estate Commission dropped its approval of the use of Installment Land Contracts (“ILCs”), consumers still frequently ask brokers about ILCs. Even in its pre-disapproval comments, the Manual stated: “this instrument is full of pitfalls for both buyer and seller, and may be used under circumstances to the injury of the buyer and, under other circumstances, to the injury of the seller.” The intent of this article is to explain these pitfalls.
Pitfalls for Sellers
What happens if the buyer defaults? Most forms provide that the seller, after complying with certain notice requirements, is entitled to have the escrow agent return the escrowed deed. Most forms also provide that the seller is entitled to immediate possession of the property. In spite of this language, obtaining title and possession may not be a simple matter.
If the buyer refuses to relinquish possession voluntarily, the seller would typically commence an eviction action. The buyer, however, may be able to successfully argue that he had an “equitable” interest in the property which could only be extinguished through a foreclosure or quiet title action.
A foreclosure on an ILC takes place through the courts, rather than through the public trustee’s office. A public trustee foreclosure on a deed of trust requires approximately five months through the end of the owner’s redemption period. A contested judicial foreclosure on an ILC demands anywhere from one to two years.
During a foreclosure, the buyer might be able to stay in the property without making payments to the seller. In the meantime, the seller may need to make payments to a senior lender to prevent foreclosure on the underlying loan, a potential deficiency judgment, and detrimental effects to the seller’s credit rating. It is rare that sellers recover these sums from buyers.
The most efficient way for the seller to take the property back is through a deed signed and delivered by the buyer to the seller subsequent to the purchaser’s default. Unfortunately, after they default, many buyers cannot be counted on to execute deeds (and the other paperwork necessary for a deed-in-lieu transaction) back to the seller.
To address this problem, some ILCs are set up such that a deed from the buyer to the seller is executed and held unrecorded by the escrow agent. If the buyer defaults, the escrow agent is supposed to return this deed to the seller for recording. Yet there are several features of this “solution” which are problematic: (1) escrow agents, after being confronted with different demands for the deeds, may not release them, or may only release them to courts; (2) Colorado law makes it clear that a deed held in escrow to secure performance of an obligation is a mortgage which must be foreclosed through the courts to extinguish the purchaser’s interest in the property; and (3) before the transfer of the deed, liens may attach to the property through the buyer. If so, the transfer from the buyer back to the seller after default is subject to the intervening liens.
Pitfalls for Buyers
Often, the primary motivation for ILCs is based on the misconception that they avoid due-on-transfer clauses contained in a seller’s underlying loan. Because a sale using an ILC is still a “transfer,” it triggers the lender’s ability to accelerate the underlying loan. Knowing this, some sellers use unrecorded ILCs. While the buyer is making its payments under an unrecorded ILC, liens could attach to the property through the seller (through no fault of the buyer) which would prevent the seller from transferring free and clear title at the end of the payment period. With unrecorded ILCs the buyer is at the mercy of the seller with respect to encumbrances such as tax and judgment liens.
If the seller did allow these liens to attach, it is unlikely that he would be able to pay the sums necessary to remove them at the end of the payment period. Though the buyer would have an excellent lawsuit against the seller, the seller may be bankrupt (preventing the lawsuit) or insolvent (precluding the suit’s effectiveness).
A further problem for purchasers is that most ILC forms are seller-oriented documents which fail to provide adequate remedies for a purchaser in the event of a seller’s default. For example, most forms fail to explicitly permit a purchaser to stop making payments to a Seller who has defaulted on his obligation to pay senior encumbrances.
Pitfalls for Both Sellers and Buyers
As noted previously, ILCs do not avoid the consequences of due-on-transfer clauses contained within the seller’s underlying loan. Whether recorded or unrecorded, a sale using an ILC could trigger the underlying lender to call its loan. Depending on the stage at which this occurs, the acceleration could have dire consequences for both the buyer and the seller.
Few ILCs address what will happen in the event the underlying loan is called. Is it the seller’s responsibility to refinance? Is it the buyer’s responsibility? What if neither the buyer nor the seller is able to refinance? What if one or the other is only able to refinance under terms less favorable than the original loan? The seller risks damage to his credit rating and a lawsuit for the deficiency balance which may remain on the note after the foreclosure. The buyer risks the equity he has built in the property.
There is some sense in the real estate community that ILCs may be used to avoid the need to obtain approval from cities or counties for Senate Bill 35 subdivisions. Sellers convey a portion of their lot with an ILC in the hope that they need not obtain approval for the subdivision. The hope is unfounded, ILCs do not avoid the necessity of obtaining government approval of subdivisions.
In 1992, the Colorado legislature began requiring the public trustee in each county to act as a tax escrow agent for all installment land contracts. This provision may cause problems for both buyer and seller as it may effectively require two tax escrows, the one maintained by the first mortgage lender, and the one required by the statute. Failure to comply with the statute may allow the buyer to void the ILC.
Installment land contracts are fraught with danger and have few advantages over notes and deeds of trust. They should be avoided.
Jonathan A. Goodman is a shareholder in Frascona, Joiner and Goodman, P.C., a Colorado law firm. His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. He can be reached at jon@frascona.com.
A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.
Disclaimer – Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. For legal advice on a specific matter, consult an attorney.
Re: One Man’s Opinion: Pitfalls of Land Contracts Article (LONG) - Posted by Rob FL
Posted by Rob FL on March 16, 1999 at 19:12:22:
In Florida, the courts have clearly established that ILC’s must be foreclosed like a mortgage. Deed’s held in escrow to reconvey the property to the seller are un-insurable from a title insurance point of view because the courts have said that ILC’s create an equitable interest and must be foreclosed (no and’s if’s or but’s).
Also, judgments and tax liens against the seller could also create an un-insurable title when the buyer goes to purchase the property.
What about if there is an environmental problem or a slip and fall accident on the property? Both parties could be held liable even if only one of them caused it.
At least down here, a deed and seller held mortgage is a much safer way to go for everyone than an ILC.
my .02
Re: One Man’s Opinion: Pitfalls of Land Contracts Article (LONG) - Posted by JPiper
Posted by JPiper on March 16, 1999 at 16:55:46:
This article points up one important fact, in my opinion. BEFORE you do a land contract, either as a buyer or a seller, you should check the law in your particular state with a qualified attorney.
This article was written based on the law in Colorado. The law isn’t the same in EVERY state. Further, some of the issues brought forth can be handled in one manner or another. But certainly these issues, and others, should be considered in light of your state law.
Don’t assume that the information that you read regarding one state applies equally to all. Not the case.
JPiper
Re: One Man’s Opinion: YEAH BUT - Posted by Bill Gatten
Posted by Bill Gatten on March 16, 1999 at 18:23:41:
Jpiper,
Contrary to popular belief (at times) I don’t profess to have all the answers. But if you honestly stop to think about it, Jim, what Colorado laws referred to in this article are not applicable in all other states relative to Contracts for Sale or Deed or Warranty Deed, in general?
I agree that laws are different in each state (e.g., in Calif. you can make a Pez dispenser out of your wife and get away with it if you’re a football player). And I know that some of the pitfalls mentioned can be patched up (e.g., have the buyer send the payments to the bank, pay by cashier’s check with a copy to seller, have co-signatory checks, request Notice of Default, don’t record…and all that). But you and I both know that for every patch, there’s another hole eventually.
Remember that old Candid Camera show, where they had a secretary’s desk rigged up so that on cue one or two random drawers would spring open? Every time she tried to hold them closed another two popped open… she eventually had to use both hands, her elbows, both legs, he knees and her nose to keep them all closed. That’s what some of these jury-rigged deals remind me of (I’ve done 'em myself…lots of them). But now, in call candor… it just isn’t necessary any longer.
I know I sound like the anal-retentive sheep running amok among the flock, worried sick about an unscheduled dipping; but honestly… why not, if an effective sheep-dip deterrent exists.
If its possible to accomplish EXACTLY the SAME end result and objectives with anther vehicle that: 1) does NOT violate the DOS, 2) does NOT force the seller into judicial foreclosure to cure a default, 3) does NOT convey equitable ownership during its term (albeit, while conveying 100% of all benefits of ownership), 4) does NOT require forfeiture (any judge in the country would toss out a contested pre-signed “Deed in Lieu” in a heart-beat, in favor of a Judicial Foreclosure: probably entailing an Ejectment Action and a Quiet Title as well), 5) does NOT subject the parties to the whims and misdeeds of the other, 6) does NOT require tile transfer, 7) does NOT have to be secretive and clandestine, etc., etc. Then…like… why not?
I don’t want to discourage the process of contingency sales; I would only discourage the form. There honestly is a more logical and safer way to get to Peoria (as it were).
Bill
Master of Metaphor
Re: One Man’s Opinion: YEAH BUT - Posted by Bill Gatten
Posted by Bill Gatten on March 16, 1999 at 18:18:05:
Jpiper,
Contrary to popular belief (at times) I don’t profess to have all the answers. But if you honestly stop to think about it, Jim, what Colorado laws referred to in this article are not applicable in all other states relative to Contracts for Sale or Deed or Warranty Deed, in general?
I agree that laws are different in each state (e.g., in Calif. you can make a Pez dispenser out of your wife and get away with it if you’re a football player). And I know that some of the pitfalls mentioned can be patched up (e.g., have the buyer send the payments to the bank, pay by cashier’s check with a copy to seller, have co-signatory checks, request Notice of Default, don’t record…and all that). But you and I both know that for every patch, there’s another hole eventually.
Remember that old Candid Camera show, where they had a secretary’s desk rigged up so that on cue one or two random drawers would spring open? Every time she tried to hold them closed another two popped open… she eventually had to use both hands, her elbows, both legs, he knees and her nose to keep them all closed. That’s what some of these jury-rigged deals remind me of (I’ve done 'em myself…lots of them). But now, in call candor… it just isn’t necessary any longer.
I know I sound like the anal-retentive sheep running amok among the flock, worried sick about an unscheduled dipping; but honestly… why not, if an effective sheep-dip deterrent exists.
If its possible to accomplish EXACTLY the SAME end result and objectives with anther vehicle that: 1) does NOT violate the DOS, 2) does NOT force the seller into judicial foreclosure to cure a default, 3) does NOT convey equitable ownership during its term (albeit, while conveying 100% of all benefits of ownership), 4) does NOT require forfeiture (any judge in the country would toss out a contested pre-signed “Deed in Lieu” in a heart-beat, in favor of a Judicial Foreclosure: probably entailing an Ejectment Action and a Quiet Title as well), 5) does NOT subject the parties to the whims and misdeeds of the other, 6) does NOT require tile transfer, 7) does NOT have to be secretive and clandestine, etc., etc. Then…like… why not?
I don’t want to discourage the process of contingency sales; I would only discourage the form. There honestly is a more logical and safer way to get to Peoria (as it were).
Bill
Master of Metaphor
Re: Exactly - Posted by Stacy (AZ)
Posted by Stacy (AZ) on March 16, 1999 at 17:36:51:
You caught me again, Jim. You’re right, I should have reinforced the fact that each state’s laws can vary on this, which is not always obvious to everyone here.
Thanks for keeping it in the correct perpective.
Stacy
How does that saying go… - Posted by Kev.
Posted by Kev. on March 17, 1999 at 14:25:28:
Bill, If they only knew what you are talking about.
I am not here to plug your stuff. We do something called the “Kevtrust*” ;^) VERY much like your Pactrust*.
I know what you are talking about. It is bulletproof.
You can lead a horse to water, but, sometimes they still become dog food. Or, something like that. hehe
Kev.(-lar). Get it? Bulletproof… Kevlar. All right. I’ll stop.
Man of the Year Awards… - Posted by JPiper
Posted by JPiper on March 16, 1999 at 19:39:52:
As far as I’m concerned any guy who can simultaneously write a dictionary (or scan one as the case may be) with the word amoramorphous in it…and come up with up with a “sheep-dip deterrent” should definitely be considered for the “Man of the Year” Award.
Lest any of our readers be confused as to the “sheep-dip deterrent” let me remind them of the "Cal-Equity PAC Trust"tm advertised under the banner at the top of this page.
Nothwithstanding this particular solution to the problem, I would stick with my comment that different states look at land contracts differently. Some states as an example DO NOT require judicial foreclosure as a remedy to a land contract…however others do as the article clearly points out. As a seller I would not do a land contract in California as an example, or probably in Colorado. However I would regard either state as a possible opportunity to buy properties this way assuming that I took care of some other issues (recording a performance mortgage to protect against possible seller liens), setting up third-party collection accounts to make payments on the underlying loan, and having proper contract provisions to cover a potential default on the part of the seller. As a buyer I would regard it as a plus in either of these states if my equitable interest had to be foreclosed judicially?.not that I would assume I would need it.
In my particular state, and others I hear, judicial foreclosure is not required in a land contract?rather an eviction. So as a seller I am not particularly concerned where there is no statute or case law supporting the judicial foreclosure contention. On the other hand there are numerous examples of evictions for non-payment under land contracts. In my state I have done land contracts where admittedly, they were written in my favor, and designed to take advantage of my particular states laws. While the buyer has a disadvantage, I can tell you that they have had ample opportunity to review the contract and propose any revision they would like?.not that I intend to revise anything. My attitude has been that they’re lucky I’m letting them into the property at all?..terrible huh? In any case they have no problem with me as long as they make payments?.and knock on wood, so far that has been the case.
The truth of it is Bill that I’m not completely familiar with your trust and it’s workings other than through your posts. It sounds like a fair and balanced method. But before I would consider using it personally I would want to have it reviewed by my attorney…just as I had him look at the land contract idea, my lease/option transactions, etc. Since I haven’t done so I really don’t have alot to say regarding the PACTrust. I will add that I noticed some of the charges that you have for some of your trustee services. I don’t know if I can operate this trust without you, but properties of the value that I deal in would not support these charges.
Keep up the posts though…I’m actually getting to where I think I have an inkling of what you’re saying. I even think I understood your definition of amoramorphous.
JPiper
Okay, I’ll ask…how’s it work? - Posted by FJW
Posted by FJW on March 17, 1999 at 17:44:05:
What’s the KevTrust all about? How’s it work? Is it the same as PACTrust? (or is this a joke?)
FJW
Re: Man of the Year Awards… - Posted by Bill Gatten
Posted by Bill Gatten on March 18, 1999 at 21:56:34:
Jim, remember, it’s not what you dip your sheep in that counts: it’s how your sheep feels about having been dipped, that matters in today’s world.
Regarding your post, I agree with you 100%; albeit, the challenge in having an attorney look a land trust over, as Bill Bronchick will tell you, is being certain that you have it looked over by one who knows what a land trust is, and why it’s vastly dissimilar from other inter-vivovs trusts. And above all, note escpecially that a “land trust” per se is as dissimilar from a “PACTrust,” as is a tractor from a float in the Founder’s Day Parade (i.e., it’s an integral part indeed, but only a part of the whole beautiful thing).
A major problem I have with the program is convincing people that it’s not meant to replace or compete with the objectives or purpose of the Land Contracts…or options: it’s simply the “way” one can do exactly the same thing, with more benefit and virtually none of the [potential for] drawbacks.
If ease of eviction and forced foreclosure (in a particular state) is not a problem, then turn to other possible short-sides than can be overcome by the use of the PACTrust (transfer of tax wrie-offer, full title protection; protection from “litigious stuff; even simpler eviction than a regular lease; etc.”
A: Do you need me, in order to do a PACTRust? Heck No! I’m happy to provide you (well, not just you, but anyone) all the documents and full directions and even the benefits of the myriad mistakes I’ve made over the years. You don’t need me… unless you’d like me to help to do your first one or two to get you rolling (your choice). I’m ashamed to admit it, but I do charge a fee *(teensy as it may be) for services and products I provide in order to help others get wealthy; but you certainly don’t have to pay me if you don’t want to. Everything I know is in the archives on CRE On Line. Dozens (hundreds) of these transactions are done annually by people other than me (and far smarter than I, I’m sure).
The dictionary is on hold, by the way, it appears someone already copyrighted the name “Webster” so we’re wating for approval on “Roget’s”. Should be just a matter of time.
Respectfully,
Bill