In the past when it became more difficult for borrowers to qualify for mortgage loans, sellers sometimes resortedto the use of Land Installment Contracts to sell their property. Since the market is experiencing similar symptoms,it may be timely to review the contract’s features.
The Land Installment Contract was created by statute in Maryland (Section 10, 101-110 of the Real Property Article). It is essentially an owner financing tool whereby seller agrees to sell the property to buyer and buyer agrees to pay the purchase price in five (5) or more installment payments, exclusive of the down payment. The seller retains title to the property as security. The property must be occupied by the buyer as a dwelling or may be an unimproved, subdivided residential lot. To be valid, a copy of the contract must be given to the buyer. The original must be recorded in the land records within fifteen (15) days of its execution, and the recorder’s receipt given tothe buyer.
The statute contains requirements to make the Land Installment Contract valid. For example, the contract must contain a provision stating that once the buyer has paid forty percent (40%) of the purchase price, he is entitled to ask the seller to record a deed and take back a mortgage for the balance. There are similar technicalities which should discourage the preparation of a Land Installment Contract by anyone except a qualified attorney.
There are few practical advantages to the use of a Land Installment Contract. It is tempting to use it as a technique for “assuming” an existing mortgage; however,whether or not its use violates the “due on sale” clause in a standard FNMA deed of trust has never been determined by the Court of Appeals in Maryland. If the mortgage lender accelerates the loan because of the land contract, it may be impossible for the buyer to retain the property. Equitable title is transferred from seller to buyer at the time the contract is recorded, so subsequent judgments against the seller will not attach to the property; however, legal title remains in the seller’s name, so the tax and assessment records are not transferred. This may confuse the buyer and lead to issues later, even if the proper disclosures are made at settlement. If the buyer defaults, the seller does not “get the property back”, but must go through a foreclosure process, the same as if he had simply held a purchase money mortgage. There are no State transfer or recordation taxes assessed when Land Installment Contract is recorded, and most counties do not collect local transfer tax. The IRS considers a transfer by land contract a “sale”, so the normal tax treatment applies.
Although it may appear that a Land Installment Contract is a solution for a cash poor buyer who cannot qualify for a new mortgage loan, its use for this purpose is not recommended. It may be practical for some transfers between knowledgeable parties as a way to achieve their objectives and defer transfer taxes, but they must be informed of all the possible consequences, and have alternatives in place.