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Legally speaking: What to do when a land contract goes south

By Peg Ritenour, OAR Vice President of Legal Services/Administration

The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law, our “Legally Speaking” series spotlights some of the timely questions that are being asked by REALTORS. This one involves the proper course of action when terminating a land installment contract…

Q: I have been approached by a seller to list his property. A few years ago he entered into a land installment contract with a buyer, but recently that buyer stopped making payments. The owner wants to terminate the land contract so he can sell the house to someone else. What should I advise the seller to do?

A: Because this is a legal matter, you need to refer the owner to his/her personal attorney for assistance. However, below is some general information about this issue.

Generally the action that the seller must initiate in this situation will depend on how long the purchaser (referred to as a vendee) has made payments on the land contract and the amount of those payments. If a vendee who defaults on a land contract has made payments for five years or more or has paid 20 percent or more of the purchase price, the seller must initiate a foreclosure process and the property must be sold by judicial sale. This is the same process that must be followed by lenders holding a mortgage.

If the vendee has made payments for less than five years or has paid less than 20 percent of the purchase price, the action that the vendor must initiate to terminate the vendee’s rights is referred to as forfeiture. Under this process, the court can declare that the vendee’s rights are forfeited and grant any other claims resulting from the contract, including restitution of the property by the owner. Before the vendor initiates this process, however, the vendee must be notified that they have a 30 day grace period to bring payments current and pay any fees provided for in the contract.

Because either of these legal actions will require court action, the property owner should be advised to seek legal counsel for advice and representation. To avoid a claim of the unauthorized practice of law, it is important for REALTORS to avoid providing legal advice to sellers in this and other legal matters.

More information about land installment contracts, lease purchase agreements and lease option agreements can be found in OAR’s White Paper on Leasing and Seller Finacing.

 

Tags: legal, Legally Speaking