Thursday Mar 30

The State of the States on Rights for Contract Buyers

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As Jack Macnamara writes, the Contract Buyers’ League in Chicago – and most of the rest of us – might have thought the such land purchases, rent-to-buy, contract-for-deed, or whatever the transaction might have been called were pretty much over and done by the mid-1970s. The Federal Housing Authority altered its plain-and-simple racial discrimination in the around 1965. The Home Mortgage Disclosure Act was passed in 1975 and the Community Reinvestment Act in 1977, and were slow down traffic signals on redlining. It seems though that we may have cut off the snake’s tail, but not its head, because not only is it back, but any random look at state statutes – some of which are fairly recent – indicates such sellers might have gone to ground, but they were still enticing buyers in our communities. The “wrongs” for contract buyers were usually found in the lack of rights they had as consumers and home purchasers in many state statutes.

Here’s a Sampling:


The Illinois foreclosure law specifically applies to some contracts for deed. First, they must have been entered into after July 1, 1987, and require payments for more than 5 years. Then, the total unpaid amount must be “less than 80% of the original purchase price of the real estate.” If all 3 of those things are true, the contract for deed gets treated like a mortgage, and a foreclosure case must be filed if the buyer defaults.

An unpaid amount of “80% of the original purchase price” means that 20% must have actually been paid. So, if the buyer has paid at least 1/5th of the purchase price, they’re entitled to a foreclosure case. The original purchase price is the total amount the buyer agreed to pay for the house. The down payment, and all regular payments, are counted in calculating whether 20% has been paid.

A foreclosure case is much kinder on a defaulting buyer. They have at least 90 days to catch up missed payments, and stop the foreclosure. Plus, they always have the right to pay off the entire contract, or mortgage, debt. Timewise, a foreclosure takes at least 7 months.

Even if a contract for deed buyer has NOT paid 20%, so that they could be evicted, the eviction law gives buyers extra rights regular tenants don’t have. Contract for deed buyers can get up to 60 days after an eviction judgment is entered to “cure” their default, get their payments back on track, and stop the eviction.

Source: Q&A on University of Southern Illinois Law School website


5313.02 Required provisions of land installment contracts.

(A) Every land installment contract shall be executed in duplicate, and a copy of the contract shall be provided to the vendor and the vendee. The contract shall contain at least the following provisions:

(1) The full names and then current mailing addresses of all the parties to the contract;

(2) The date when the contract was signed by each party;

(3) A legal description of the property conveyed;

(4) The contract price of the property conveyed;

(5) Any charges or fees for services that are includable in the contract separate from the contract price;

(6) The amount of the vendee’s down payment;

(7) The principal balance owed, which is the sum of the items specified in divisions (A)(4) and (5) of this section less the item specified in division (A) (6) of this section;

(8) The amount and due date of each installment payment;

(9) The interest rate on the unpaid balance and the method of computing the rate;

(10) A statement of any encumbrances against the property conveyed;

(11) A statement requiring the vendor to deliver a general warranty deed on completion of the contract, or another deed that is available when the vendor is legally unable to deliver a general warranty deed;

(12) A provision that the vendor provide evidence of title in accordance with the prevailing custom in the area in which the property is located;

(13) A provision that, if the vendor defaults on any mortgage on the property, the vendee can pay on that mortgage and receive credit on the land installment contract;

(14) A provision that the vendor shall cause a copy of the contract to be recorded;

(15) A requirement that the vendee be responsible for the payment of taxes, assessments, and other charges against the property from the date of the contract, unless agreed to the contrary;

(16) A statement of any pending order of any public agency against the property. (B) No vendor shall hold a mortgage on property sold by a land installment contract in an amount greater than the balance due under the contract, except a mortgage that covers real property in addition to the property that is the subject of the contract where the vendor has made written disclosure to the vendee of the amount of that mortgage and the release price, if any, attributable to the property in question.

No vendor shall place a mortgage on the property in an amount greater than the balance due on the contract without the consent of the vendee.

If the vendee of a land installment contract has paid in accordance with the terms of the contract for a period of five years or more from the date of the first payment or has paid toward the purchase price a total sum equal to or in excess of twenty per cent thereof, the vendor may recover possession of his property only by use of a proceeding for foreclosure and judicial sale of the foreclosed property as provided in section 2323.07 of the Revised Code.

From the Ohio Statutes Statutes were instituted in 1969 with the most recent revision in 1993; others from 1980, 1986.


846.30 Redemption period for land contracts. If a court finds that the purchaser under a land contract is obligated to make certain payments under that land contract, that the purchaser has failed to make the required payments and that the vendor is entitled to a judgment of strict foreclosure, the court shall set a redemption period of at least 7 working days from the date of the judgment hearing or, if there is no hearing, from the date of the entry of the judgment order. No judgment of strict foreclosure is final until the court enters an order after the expiration of the redemption period confirming that no redemption has occurred and making the judgment of strict foreclosure absolute. History: 1995 a. 250.

From the statute.


Louisiana

Louisiana Bond for Deed Laws.

Some highlights:

• The buyer will not be reimbursed by the Seller on any improvements or repairs made to the property if they fault on a payment and the property is foreclosed

• There isn’t much protection for the buyer in the legislature, most/all of it is ensuring the protection of the Seller

• Buyer is required to obtain all insurances and keep up on those payments

“During the installment period (the period where the buyer makes payments to the seller) the seller retains full legal rights though the buyer can make improvements on the property and live there. If the buyer defaults, then the entire property goes back to the seller. In some cases, such as Louisiana, the buyer is out for all of his improvements.”

The questions & answers prepared by the Rio Grande Legal Services gives a good, plain spoken sense of the rights in Texas. Importantly as part of this “best-in-the-nation” set of provisions won in the early 1990s by Texas ACORN, if a buyer is foreclosed they also get a refund of the down payment and fair value, reimbursement for any improvements the “buyer” had made to the property. The provision of 48 payments to gain “equity” status is also better than most other states where the language either doesn’t exist or ambiguously indicates 20% or 5 years.

What are my rights as a buyer under a contract for deed?

The law (Deceptive Trade Practices Act, or DTPA) requires that certain information to be given to the buyer in writing. If the negotiations are in Spanish, the written information must also be in Spanish.

You have the right to know the condition of the property, including:

• whether utilities are available, including whether septic has been approved,

• if it is part of a subdivision, who maintains the roads, and if it is in a flood zone,

• whether any back taxes are owed, and

• the types of buildings that are allowed on the property.

You have the right to know the terms of financing, including:

• the purchase price, and total amount to be paid, including interest,

• the interest rate, and total interest to be paid, and

• the terms for late fees (which by law cannot be more than 8% of your monthly payment).

You have the right to an annual accounting by Jan 31st of every year that includes:

• what you’ve paid so far,

• what you owe,

• the number of payments left, and

• the property taxes paid.

You have the right to take title within 30 days of your last payment under the contract.

Can I cancel the contract for deed?

Yes. You have the right to cancel the contract within 14 days after you signed it by sending notice of cancellation to the seller by certified mail or hand delivery. You can also cancel the contract if the seller:

• fails to properly plat or subdivide the property, or

• fails to provide water and sewer service.

Can the seller cancel my contract for deed?

If you miss a payment, the seller may send you written notice of default by certified mail. The notice must state what you owe in principal and interest, additional charges (like late fees), the contract terms that were violated, and what you can do to cure the violation. What happens next depends on how long or how much you’ve paid.

• If you’ve paid less than 40% of the amount due or made less than 48 payments –cure the default within 30 days or notice. If not, the seller can cancel the contract and take possession of the property (through an eviction procedure).

• If you’ve paid more than 40% or made more than 48 payments – cure the default within 60 days of the notice. If not, the seller can post, file, and serve notice of sale similar to a foreclosure.

(Prepared by Rio Grande Legal Services)


(From Community Legal Services in Philadelphia, PA)

What is commonly understood to be “rent to own” agreements are contracts to purchase houses over time from owners, and are actually installment land contracts. This agreement usually occurs when someone is renting out a home but wants to sell it without getting a realtor involved, or when a buyer/renter cannot qualify for financing to purchase the property outright. The buyer acquires “equitable” or “beneficial” title when the agreement is signed, and makes installment payments towards the purchase of the property. The seller keeps the deed in his or her name until the agreement is paid in full. After the agreement has been paid in full, often many years later, a closing is held, and the seller transfers the deed.

Acquiring “equitable” title allows the buyer to enjoy the benefits of ownership such as being able to possess and improve the property. However, because the seller retains legal title, the property cannot normally be used as collateral for a home equity loan. Still, under Pennsylvania law, the relationship between the buyer and seller is treated like the relationship between a mortgagor, usually the borrower, and mortgagee, the bank or servicer. For instance, buyers are entitled to pre-foreclosure notices giving them the chance to cure defaults in payments just like mortgagors. Moreover, sellers have to file actions in ejectment to determine the title issues involved instead of just filing quick rental evictions actions. In fact, the also IRS treats such agreements as sales and the buyer has the tax benefit of ownership, including being able to claim interest paid to the seller as deductible “mortgage interest.” Most important, if more than six installments are due under the agreement, then the agreement is governed by Pennsylvania’s Installment Land Contract Law, which regulates the relationship between buyer and seller and incorporates various protections for buyers.

Summary

Confused yet? Imagine you are a lower income buyer desperate to finally own a home, but out of luck without perfect credit now that the subprime market has disappeared and there are vast credit deserts in our communities when it comes to smaller loans, even for home purchase, then where do you go? Or, perhaps you are undocumented, but know that you have no chance of equity by continuing to rent? Contract-for-deed arrangements may seem, just as they did prior to the 1970s, the only alternative, no matter how predatory the instrument.

The state laws are a hodgepodge as you can see, even with the help of many of these find law schools and legal service offices. Is there a requirement to record the contract? If so, is it the buyer or seller that must do so? Are there penalties for not recording? RealtyTrac told the newly organized Contract Buyers Campaign that of 900,000 foreclosures on their database since 2009, they only knew of 2000 contract agreements, based on registrations filed with county offices. The National Consumer Law Center estimates the real number is over 3.5 million contract-for-deed arrangements currently. Time to cut the head off this snake.

For more information: www.contractbuyerscampaign.org.

Special thanks to Courtney Foster, Tulane University for research on sample state laws on contract for deed purchase arrangements.

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