Land Contract - Installment Payments

Installment Payments

It is common for the installment payments of the purchase price to be similar to mortgage payments in amount and effect. The amount is often determined according to a mortgage amortization schedule. In effect, each installment payment is partially payment of the purchase price and partially payment of interest on the unpaid purchase price. This is similar to mortgage payments which are part repayment of the principal amount of the mortgage loan and part interest. As the buyer pays off more of the principal of the loan, his(her) equitable title or interest in the property increases. For example, if a buyer pays a $2000 down payment and loans $8000 for a $10000 parcel of land, and pays off in installments another $4000 of this loan (not including interest), the buyer has $6000 of equity in the land or 60% of the equitable title, but the seller holds legal title to the land as recorded in documentation (deeds) in a government recorder's office until the loan is completely paid off. However, if the buyer defaults on installment payments, the land contract may consider the failure to timely pay installments a breach of contract and the land equity may revert to the seller, depending on the land contract provisions.

Since land contracts can easily be written or modified by any seller or buyer; one may come across any variety of repayment plans. Interest only, negative amortizations, short balloons, extremely long amortizations just to name a few. It is not uncommon for land contracts to go unrecorded. For several reasons, the buyer or seller may decide that the contract is not to be recorded in the register of deeds. This does not make the contract invalid, but it does increase exposure to undesirable side effects. Some states, such as Minnesota, issue contracts without an acceleration clause, which in the case of a default leaves the seller in a position to either cancel the contract, discharging any principal deficiency, as in the case of deprecation, or to litigate for 18 months or more while letting the buyer, if not a corporation, retain their rights to the property while collection attempts are made, by which time the buyer will often qualify for bankruptcy, making the contract, when lacking said acceleration clause, effectively an installment option, when the buyer has no other lienable assets. In bankruptcy, some regions will interpret it as an executory contract than can be rejected, while others will treat it as a debt to be paid out of the bankruptcy trust. This and a wide variety of other legal ambiguities has led to a trend toward restatement as mortgages to eliminate any incentives to not simply use the more clarified in law note and mortgage.