Q: We are under contract to purchase a house in the District of Columbia, and are having a very difficult time finding financing. The seller suggested an installment real estate contract, permitting us to complete the transfer; at a later date, when mortgage money is more readily available, we could then obtain regular financing. Exactly how does this installment contract work, and are there any legal areas that should concern us?
A: I have always had great difficulty installment real estate contracts. While they are very common in the western part of the United States, there are so many problems and uncertainties with this kind of transaction that I urge extreme caution before making a commitment. It is clear that your seller would like to use this procedure to get around the non-assumability of the existing loan.
Over-simplified, the installment contract -- also referred to as contract for deed or land contract -- is a legal transaction where the buyer makes a down payment, and the balance of the purchase price is paid in monthly or quarterly installments. Title to the property does not turn over to the buyer until a set time, generally agreed upon by the parties.
In the absence of specific statute (such as exists in Maryland), the parties are free to enter into any contractual arrangement they want, as long as it does not violate public policy. Generally speaking, the seller is obligated to convey title in accordance with the terms of the contract. This could be when the buyer either pays the entire purchase price in full or reaches a certain point in the transaction.
Needless to say, this raises many serious legal problems. Let's look at it from the seller's point of view first.
The seller wants to make sure that taxes will be paid when they become due. If there is a mortgage, the seller wants to be satisfied that the mortgage payments are made when due so that no foreclosure will result. After all, until the deed is transferred to the buyer, the seller still holds legal title.
Additionally, the seller must be concerned about the condition of the property. If the buyer will be living in the property, adequate safeguards must be spelled out in the contract giving the seller the right to inspect the premises periodically, and requiring the buyer to maintain insurance in the event of a fire or other hazard.
The buyer has problems also. What guarantee does the buyer have that the seller willnot sell the property fraudulently to other purchases? It is absolutely impreative that the land contract sale be recorded in the jurisdication where the land is located. Many states laws, such as Maryland's, require that these contracts be recorded, but there is no universal law that requires this recording.
What arrangement will be made for the actual conveyance of the deed, when the terms of the contract have been met? If transfer of title is not to take place for a number of years, if's conceivable that the seller could die, or otherwise incapacitated. It is advisable to require the seller to put the deed in escrow with a public institution or an attorney so that the escrow agent will have the absolute authority to record the deed in favor of the buyer when the conditions of the contract have been met.
Finally, we have a very serious problem which thus far has been unresolved. The reason your seller wants this kind of transaction is to get around the language in the standard deeds of trust (mortgages) that states: "If all or any part of the property or an interest therein is sold or transferred by borrower without the lender's prior wirtten consent . . . the lender may . . . declare all the sums secured by this deed of trust to be immediately due and payable."
This is known as the non-assumability clause of the standard deed of trust, also referred to as the due-on-sale clause. The due-on-sale clause has been determined to be against the public policy of eight states.
However, Maryland, Virginia and the District of Columbia have no such ruling, and thus there remains uncertainty as to what the courts would do if faced with a challenge to the due-on-sale clause.
However, under the standard deed of trust for the District, since the loan is due and payable in the event of a sale or transfer of the property, one must look at whether a land installment contract is such a sale or transfer. Legal title remains in the seller.
However, the seller does convey an interst to the buyer, known as "equitable title." It is my opionion that under this standard deed of trust clause, a lender could raise a very valid point that since there is a transfer of title -- albeit equitable -- the entire mortgage is due and payable.
Whether lenders will do this or not depends on a number of factors -- including their hesitancy to face a test on the due-on-sale clause. However, both buyer and seller should go into the installment contract with their eyes wide open and their legal rights fully protected.