Results 1 to 7 of 7
  1. #1
    Join Date
    Sep 2015
    Posts
    2

    Default What Happens if You Default on a Land Contract

    My question involves a mortgage in the state of: Michigan

    MY wife and I are going into the fourth year of our land contract, with a balloon payment due in a little over a year, and we're trying to weigh our options. The contract was registered with the county. Basically, we stumbled into this house as we were starting our family (began as renters, converted to 5 year land contract) we know we don't want to live in the home long term because we want to move to the country. Also we've put SIGNIFICANT work into the house, but there are significant things that still need to be done (probably 20K in roofing and yard/landscape work.) Because of that, we aren't sure if it will be finance-able.

    Bottom line, if we are not able to get financing, or discover that the balloon payment + the needed repairs will cost more than the house is worth, what happens if we just walk away at the end of our five year initial term without making the balloon payment? Does it simply revert back to the seller? Can the seller come after us and sue to get the money for the balloon payment? Is that kind of walking away equivalent to a foreclosure with all of the related consequences?

    Thank you in advance for any insight.

  2. #2
    Join Date
    Mar 2013
    Posts
    16,791

    Default Re: What Happens if You Default on a Land Contract

    Since I cannot read your contract from here I can only answer your questions in the abstract and suggest you review your options with an attorney.

    Quote Quoting msusnicknel
    View Post

    MY wife and I are going into the fourth year of our land contract, with a balloon payment due in a little over a year, and we're trying to weigh our options. The contract was registered with the county. Basically, we stumbled into this house as we were starting our family (began as renters, converted to 5 year land contract) we know we don't want to live in the home long term because we want to move to the country. Also we've put SIGNIFICANT work into the house, but there are significant things that still need to be done (probably 20K in roofing and yard/landscape work.) Because of that, we aren't sure if it will be finance-able.
    Which is the biggest risk about land contracts and why they often turn out to be losing propositions.

    Quote Quoting msusnicknel
    View Post

    Bottom line, if we are not able to get financing, or discover that the balloon payment + the needed repairs will cost more than the house is worth, what happens if we just walk away at the end of our five year initial term without making the balloon payment?
    One thing is that you lose every nickel you put into the place. All the improvements become a gift to the owner. And all you've done is pay rent and improve his property.

    Quote Quoting msusnicknel
    View Post

    Does it simply revert back to the seller?
    Probably.

    Quote Quoting msusnicknel
    View Post

    Can the seller come after us and sue to get the money for the balloon payment?
    The only answer to a "can" question is yes because anybody can sue anybody for anything. Whether he can win depends on the terms and conditions of your contract. However, if I had to speculate, I'd say it's unlikely that he would sue.


    Quote Quoting msusnicknel
    View Post

    Is that kind of walking away equivalent to a foreclosure with all of the related consequences?
    Not necessarily.

  3. #3
    Join Date
    Sep 2015
    Posts
    2

    Default Re: What Happens if You Default on a Land Contract

    Thank you. I realize that any improvements would be a gift to the owner. We're kind of in the "this is a money pit" situation, and are assessing whether it is time to cut our losses and move on, or try to fix it up to the point of being finance-able to resell it. It is a large house with lots of potential, but we can't change the one thing that matters the most to us, the location. So we know don't want to be there long term, just trying to make the best of an imperfect situation. And we want to do it in the best way possible for everyone (contract holder as well as us.)

    Again, thank you.

  4. #4
    Join Date
    Mar 2013
    Posts
    16,791

    Default Re: What Happens if You Default on a Land Contract

    Couple of suggestions to help you evaluate your situation.

    Start by getting an appraisal that will show you the current market value as is and the potential market value with completed repairs.

    Then compare those figures to your balloon payment and determine if you are getting a good deal (way below market).

    Read your contract and determine if any part of your monthly payments are actually applied to the purchase price.

    See if fix up mortgage loans are still available. They were designed to give you enough to buy a house plus extra for the fix up costs. Although if the balloon payment that you have to finance is considerably less than market value that might not be an issue.

    Also try to determine which way home values in your area are going. You can find that stuff on line.

    Once you have all that information, you'll be in a better position to make that decision.

  5. #5
    Join Date
    Sep 2005
    Location
    Behind a Desk
    Posts
    98,844

    Default Re: What Happens if You Default on a Land Contract

    If you default on a land contract, the seller has the option of seeking forfeiture or going through the foreclosure process. Forfeiture is a more simple legal proceeding, but if you have equity in the property you will lose it if the seller chooses that option. If the seller forecloses, there's potential for a deficiency judgment -- but it will be a much more costly and cumbersome exercise for the seller.

  6. #6
    Join Date
    Sep 2013
    Posts
    127

    Default Re: What Happens if You Default on a Land Contract

    Every house I have purchased has been on a land contract. Best way to look at a land contract is that it is a rental with no lease, but you are responsible for repairs and maintenance. You can normally walk away at any time, but as mentioned any improvements are gifts.

    Very often you'll find that land contracts with a sizable balloon payment are looked at by the seller as pure income property, they don't pay maintenance or taxes, and just collect rent because few people are able to make the balloon.

  7. #7
    Join Date
    Sep 2005
    Location
    Behind a Desk
    Posts
    98,844

    Default Re: What Happens if You Default on a Land Contract

    Quote Quoting puppybreath
    View Post
    You can normally walk away at any time, but as mentioned any improvements are gifts.
    You can walk away, but the seller does not have to allow you to walk away without consequence if they choose foreclosure, as opposed to the modest consequences of forfeiture or if they allow you to deed the property back to them.

    1. Sponsored Links
       

Similar Threads

  1. Land Contracts: Default by Land Contract Buyers
    By hlmango in forum Buying, Selling and Conveying Real Estate
    Replies: 2
    Last Post: 04-11-2014, 05:11 AM
  2. Land Contracts: If You Default on a Land Contract Do You Get Your Deposit Back
    By jwright in forum Buying, Selling and Conveying Real Estate
    Replies: 8
    Last Post: 04-24-2013, 09:48 AM
  3. Land Contracts: Can I Start a Land Sales Contract After I Have Quitclaimed a Piece of Land
    By martin007 in forum Buying, Selling and Conveying Real Estate
    Replies: 1
    Last Post: 08-22-2010, 06:21 PM
  4. Land Contracts: Land Contract Gone Bad
    By stumped in forum Buying, Selling and Conveying Real Estate
    Replies: 3
    Last Post: 08-15-2008, 11:56 AM
  5. Land Contracts: Terminating A Land Contract
    By loriandcyd in forum Buying, Selling and Conveying Real Estate
    Replies: 1
    Last Post: 01-26-2008, 12:40 PM
 
 
Sponsored Links

Legal Help, Information and Resources