Q: I own a one-family house in Maryland that I rent to a family. The tenants would like to purchase the house, but do not have-enough cash for the down payment. It has been suggested to me that I can sell the house to the tenants on a conditional sales contract (installment sale) and that I would still own the house until a specified amount of money has been paid to me. However, my mortgage is non-assumable, and has the following clause in it:
"If equitable title to the property securing this note be acquired by any person . . . then the whole of the unpaid balance of the indebtedness . . . shall immediately become due and payable, at the option of the (mortgage company).
Would I violate the terms of the mortgage if I sold the house on a conditional sales contract?
A: You probably would hear from your mortgage company just as soon as they learned about the sale. You are transfering the property to your tenant, even though legal title remains with you until the deed is recorded. Why not talk to your lender, and find out whether they will give you permission to sell the house, and let your tenant assume the existing mortgage. You would then be able to take back a second trust (mortgage) for the balance of the sales price. Your lender may want to change the terms of the current mortgage, and may want to raise the interest rate for your tenant. But it is in your tenant's best interest if they can assume the mortgage, since they will be able to buy your house.
I am very much against the land sales contract arrangement.Basically, under a land sales agreement (also known as an installment sale), a contract price is agreed upon, and the buyer makes periodic payments on the purchase price until an agreed amount has been reached, at which time full legal title transfers to the buyer. Whether you are a buyer or a seller, such an arrangement creates many difficult legal problems.
From the seller's point of view, what guarantee do you have that the buyer will continue to stay in the property? If the buyer stops making payments, in some states, including Maryland, you have to foreclose just as if there were a mortgage. Additionally, you will want to assure yourself that your contract buyer is maintaining the property in good shape, since in reality you still own the property.
From the buyer's point of view, a land sales contract poses even more problems. There have been cases where the seller really hasn't owned the property in the first place, and when the time comes to turn over the deed, the seller was unable to do so. Additionally, the buyer may have made a significant number of payments, which can be lost if the seller has spent the money. There have also been incidents where the seller has sold the same property three or four times to different buyers, and left town before the lawsuits started.
Because of these concerns, you should be very wary of entering into an installment sales arrangement.
Benny L. Kass, a Washington attorney, answers questions through this column. Write him in care of the Real Estate Section, The Washington Post 1150 15th St. NW, Washington 20071.