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What is a land sales contract?

A land sales contract is a form of alternative documentation for a carryback sale. [See RPI Form 168]

A basic land sales contract is an agreement to convey title to the buyer only when the buyer fully satisfies the dollar amount remaining unpaid on the purchase price.

When using land sales contracts, it becomes a full though improper substitute for escrow’s use of a grant deed, note and trust deed. Thus, the new owner or buyer on taking occupancy does not become the vested owner of record. Instead, the seller retains title as security for payment under the land sales contract.

Under a land sales contract, a buyer (referred to as a vendee) and seller (referred to as a vendor) enter into an agreement for the sale of property with the price payable on credit terms. Here, the buyer takes possession of the property and makes payments called for in the agreement. In most instances, the transaction lacks a formal escrow, title insurance and the numerous seller mandated disclosures of property conditions and seller financing. [See RPI Form 300 and 300-1]

Vested title does not pass to the buyer by grant deed until the buyer pays the seller in full, satisfying the buyer’s obligation under the land sales contract.

However, when a seller enters into a land sales contract, an equitable conversion of ownership occurs, legally altering the seller’s vested ownership to that of a lien on the buyer’s ownership interest in the property. The buyer’s occupancy gives public notice of the conversion, though the public record does not reflect the existence of the land sales contract.

From the moment of entry into the contract and the passing of possession to the buyer, the seller is only entitled to receive money, but not a return of the property on a default, except by foreclosure. Thus, by conversion, the buyer becomes the equitable owner of the real estate with the right of redemption to pay all sums due to the seller and receive title as the legal owner.

No right of reinstatement for delinquent payments exist for the buyer under a land sales contract, just redemption by full payoff of the debt owed. [Tucker v. Lassen Savings and Loan Association (1974) 12 C3d 629]

However, as straight-forward as the land sales contract may sound, in practice it has proven to be an extremely fragile financial and legal affair for all involved.

Buyer benefits lost

 As part of the process under a land sales contract, the buyer often fails to exercise their full benefits of ownership, such as:

  • interest (and possibly depreciation) deductions;
  • the right to further encumber or otherwise use the equity in their property; and
  • property tax homeowner and veteran exemptions.

Further, hiding the sale from the mortgage holder means hiding it from everyone, including:

  • the Internal Revenue Service (IRS);
  • the Franchise Tax Board (FTB); and
  • the local property assessor and tax collector.

Other disadvantages exist for buyers who use land sales contracts in lieu of a grant deed, note and trust deed. These negative results include the failure to record the documents used and consequently the loss of the benefit extended to recorded transactions as well as the lack of title insurance to defend the buyer’s ownership.

At the very least, a carryback transaction which is intended to be unescrowed, unrecorded and uninsured needs proper documents — a grant deed, note and trust deed as opposed to a land sales contract — to avoid compounding the failure to record and obtain a title insurance policy.

Land sales contract foreclosure

When a buyer defaults on payments under a land sales contract containing a nonjudicial (trustee’s) foreclosure provision, the seller needs to serve the defaulting buyer with a notice of default (NOD) and a debt acceleration notice. [See RPI Form 168 §15]

California land sales contracts without a nonjudicial foreclosure provision need to follow strict judicial foreclosure processes that give defaulting homebuyers time to pay the balance of the price yet unpaid. However, when the buyer does not timely satisfy the entire debt after commencement of a judicial foreclosure sale, the seller (or highest bidder) becomes the owner of the property.

In either method of foreclosure, the seller may not pursue the buyer to collect any loss due to a deficiency in the value of the secured property. Further, to foreclose a defaulting buyer under a land sales contract, a power-of-sale clause needs to be included in the contract authorizing non-judicial foreclosure. Also, without the power-of-sale clause, the seller may act on a forfeiture of the contract against a defaulting buyer. [See RPI Form 168 §15]

In land sales contract foreclosure under the power-of-sale provision, a defaulting buyer may bring all delinquencies current to keep their property. Although California allows land sales contract forfeiture, a defaulting buyer may file a court action and force the seller to foreclose judicially, or simply recover the dollar amount of the equity lost in the forfeiture activity of the seller.

Thus, a defaulting buyer who has built up a substantial equity under a land sales contract without a power-of-sale provision has an unconditional right to complete the purchase by paying the entire remaining balance, a redemption. However, the buyer has no right to reinstate on a default, unless the contract includes terms for a reinstatement or a trustee’s power-of-sale provision (which automatically permits the rights of reinstatement and redemption). [Petersen v. Hartell (1985) 40 C3d 102]

History behind the word

The land sales contract was widely used from the late 1960s to the late 1970s as the preferred method for avoiding due-on enforcement by mortgage holders.

A land sales contract is known by many names, including a conditional sales contract, installment sales contract or real property sales contract. Each refers to the same seller finance activity.