Cautionary Tale of Land Contract Sales

         The use of Land Contracts for the conveyance of real property has become more popular. A land contract is an agreement for the purchase of real estate on installment payments. This differs from the traditional earnest money deposit upon offer and lump sum at closing. Lately, there are more interested buyers who are able to pay but unable to find a lender from which to borrow money through the traditional methods. Some prospective borrowers may have suffered a temporary set back and been foreclosed on previously, but are now gainfully employed. Others may have a steady job, but at a lower income than before which put them into trouble with their previous lender. Both of these situations may require the borrower to wait at least two years before seeking a traditional home loan.
          While land contracts themselves do not pose a hazard - in fact they can be mutually beneficial to buyer and seller in a tough real estate market. However, There are some in Michigan who must tread lightly when taking part in such a transactions. Most notes for home loans contain a "due on sale" clause, which requires that if the property subject to the note and mortgage are conveyed or transferred that the entire remaining unpaid balance of the note is due. Most due on sale clauses require the borrower to get written permission from the lender before entering into a land contract on the subject property. Michigan State law imposes a penalty for any licensee who assists in avoiding the due on sale clause. (MC.L. 445.1628)http://legislature.mi.gov/doc.aspx?mcl-445-1628. This penalty is spelled out in subsection 2 as

"Any person licensed to do business in this state who, while carrying on that business, knowingly advises a person selling or transferring property securing a residential window period loan not to notify a lender as required by section 3 or who knowingly otherwise aids or assists a person in evading the enforcement of a due-on-sale clause enforceable under this act shall be liable for a civil fine not to exceed $5,000.00 for each offense and shall be subject to revocation of his or her license."  (emphasis mine)       

      Licensees in the State who should be wary include, but are not limited to, Real Estate Agents, Title Agents, Mortgage Brokers, and Attorneys. It has been suggested by the Michigan Association of Realtors (MAR) that while the licensee has no affirmative duty to contact the lender, they should still be cautious. MAR recommends that real estate agents should make their home owners aware that their loans may contain a due on sale clause and that the homeowner should seek the written approval of the lender before entering in to a Land Contract sale. MAR also suggest that real estate agents have the home owner sign an acknowledgment that they were advised to do so and keep it in the file.
     This signed acknowledgment is good advice for other licensees as well to keep in their files. While I am currently hearing through my available channels that more lenders are agreeable to written approval of a land contract, that this may not always be the case. Ultimately, if the lender chooses to enforce its due on sale clause, which may happen  if and when mortgage interest rates rise, it is best to be covered. I think all Michigan licensees would agree that it is best to avoid any penalties or threat of losing one's license over such an easily avoidable situation.