By: Attorney Samuel J. Spurney
It is no secret that interest rates have been rising over the last year and it is unclear whether interest rates will come down any time soon. As widely reported, the rise in interest rates has cooled the real estate market causing some buyers to pause moving forward with real estate purchases. As an alternative to traditional financing, a land contract, also known as a contract for deed, is a legal agreement in which the real estate seller agrees to finance all or a portion of the purchase of the property rather than the buyer obtaining traditional bank financing. If documented properly and if both sides are fully aware of the risks and potential consequences, land contracts can be a successful alternative to traditional financing.
Under a land contract in Wisconsin, the seller retains a lien on the property until the buyer has paid the land contract price in full. After the land contract is signed, the buyer typically has the immediate right to occupy and utilize the property as a typical owner would, and is responsible for all taxes, maintenance, and costs related to the property, but buyer does not have free and clear ownership of the property until the land contract is paid in full and the seller’s land contract rights are released by seller executing and recording a deed transferring the property to the buyer.
There are several key terms that are typically included in land contracts in Wisconsin. These include:
- Purchase price: The total amount that the buyer will pay for the property, including any financing charges or fees.
- Payment terms: The schedule of payments that the buyer will make to the seller, including the amount of each payment and the due date. Land contracts can be structured with lengthy (10-30 year) payment terms, or a balloon payment can be established allowing buyer to make monthly payments for a few years allowing buyer to seek refinancing through a traditional lender until the full balance is due under the land contract.
- Interest rate: Provided that the interest rate is within established IRS guidelines, the interest rate can be flexible and is not subject to any parameters established by any other governmental agency or the central bank.
- Default: The consequences if the buyer fails to make the required payments or otherwise breaches the terms of the land contract. Typically if the buyer defaults there is an increase in the interest rate during such period of default and seller may initiate foreclosure proceedings to recover the property, among other potential seller remedies.
- Transfer of ownership: The conditions under which the seller will transfer free and clear ownership of the property to the buyer, typically upon buyer’s compliance with all terms of the land contract and full payment of the purchase price and all financing charges.
Land contracts can be a useful option for buyers who may not presently qualify for traditional financing, and often can be used to “bridge the gap” to until buyer can obtain traditional financing. They can also be a good option for buyers who want to purchase a property with a lower down payment or if a seller is willing to finance the transaction at an interest rate that is less than what traditional lenders are able to offer.
It is important for both buyers and sellers to be aware of the potential risks and drawbacks of land contracts. For buyers, buyer does not have clear ownership of the property and the seller may have the right to foreclose on the property if the buyer fails to make the required payments. Additionally, buyers may not have the same consumer protections as they would with traditional lending.
It is crucial for Sellers to understand that by agreeing to sell a property via land contract, they become “the bank” and by doing so are taking on certain risks, such as facing additional legal and financial responsibilities, needing to pursue buyer for delinquent payments and to initiate foreclosure proceedings if buyer fails to pay timely or otherwise comply with its rights and obligations under the land contract. The additional risk that sellers take on by financing the transaction via land contract cannot be ignored and should be discussed with a real state attorney. Some ways that sellers address these risks are by requiring a large down payment and high interest rate to compensate for increased risk.
Overall, land contracts can be a useful option for both buyers and sellers in Wisconsin, but it is important to carefully consider the potential risks and benefits before entering into a land contract. Both parties should seek legal counsel and financial advice to ensure that they understand their rights and responsibilities under a land contract.
If you have questions or would like to discuss the risks and benefits of a land contract transaction, please do not hesitate to contact the real estate team at Steimle Birschbach, LLC. We would be honored to represent you and your business. Straight Talk. Solid Advice. That’s our way of doing business.
This blog post is provided for informational purposes only and by its very nature is very general. This information is not intended as legal advice.