Homeowners in unfair contracts still have power

The American dream may look a little different from person to person, but for many of us, there’s one thing our dreams have in common: a place to call home.

Even though homeownership is a goal for many Americans, not everyone is able to qualify for a traditional bank mortgage. Whether due to insufficient income, poor credit history or the need for a low down payment, many families resort to purchasing homes by entering into land sale contracts.

Land sale contracts, also called land installment contracts or contracts for deed, are arrangements in which the buyer enters into an agreement to purchase property directly from a seller. Usually a down payment of between $1,000 and $50,000 is made and then monthly payments made directly to the seller, rather than to a third-party bank or other lender. Some of these contracts include a large balloon payment at the end of the contract term.

In most cases, the seller maintains legal title, or the deed, to the property until the buyer makes her last payment. Typically, these agreements require the buyer to pay property taxes, homeowners’ insurance and the cost for repairs. This means that the buyer has all of the responsibilities of homeownership without legal title to the property through a deed.

While this might sound like a reasonable option for purchasing a home, there’s one particular detail that is detrimental to buyers: Sellers often attempt to evict them if they miss a payment. A seller may also claim he is entitled to both regain possession of the home and keep all the payments the buyer has made, including down payments. In comparison, a buyer who misses a mortgage payment to a bank may have 60 days or more to make up a missed payment before being reported to a credit bureau. Also, he may be behind 120 days or more before the foreclosure process is started. In addition, traditional mortgage lenders are often open to arrangements with buyers where past-due amounts on a mortgage are paid back over a certain period of time. They may also lower the monthly payments to an affordable amount when the buyer’s income has decreased unexpectedly.

Let me put this into perspective. Imagine you’ve put a $10,000 down payment on a home and have made regular monthly payments of $600 for 19 years, but you weren’t able to make your payment this month. You’ve just received an eviction notice telling you to vacate within 30 days or a court action to evict you will be filed. If a detainer (or eviction action) is filed and the court finds that you, the buyer, must move, you may have only 10 days to vacate. Not only do you now have to find somewhere else to live, but under the land sales agreement, the owner may refuse to return any of the nearly $147,000 you’ve paid up to that point.

This is a common scenario in cases involving alleged breaches of land sale contracts. In fact, it’s often a predatory tactic called “churning” used by many property owners who know that many buyers who are unable to be approved for traditional mortgages won’t be able to complete payments under the land sale agreement. An industry has developed in which people, and even companies, purchase dozens of homes and sell them under land sale contracts, only to take advantage of buyers who will likely not be able to finish the purchase. Once the buyer misses a payment or two and is evicted, the home is immediately placed under contract with a new, unsuspecting buyer with a new down payment. A new buyer is sometimes found even before the previous buyer has moved out of the property.

Another typical scenario involves trouble with the end-of-contract balloon payment. Properties purchased under land sale agreements are often mobile homes, structures many lenders will not finance even if affixed to the land. So, when the large balloon payment is due and the buyer must apply for financing in her own name to pay that, she is often not approved for a loan because of the bank does not finance the purchase of a mobile home. Buyers who may be out of options are sometimes forced to leave the home, losing all of their investment.

This is exactly what happened to a recent Legal Aid Society client. Her land contract stated that the seller would finance the home for five years, and then she would pay the remaining balance in full. She had made a down payment of $8,000 and regular payments of $668 per month for 30 months, totaling over $48,000. In addition, this client had invested in the property by making repairs and improvements, while also paying the property taxes and homeowner’s insurance.

After applying for and being denied a loan to finance the $50,000 balloon payment due at the end of the contract term, she was served with a notice to appear in court that told her the seller was attempting to evict her. She first appeared in court on her own and was told by the court to move out within 10 days. Also, the court did not require the seller to return any of the $48,000 she had paid to the seller at that point.

Legal Aid Society then agreed to represent the buyer and quickly filed an appeal. On appeal, we argued that the seller did not have the right to evict our client and did not have the right to keep all of the down payment and other payments made. In this particular case, we reached an agreement, giving our client extra time to obtain financing, which she was able to do — thereby saving her home.

We see many cases like this. Buyers are desperate for a home, so they enter into land sale contracts not truly understanding the terms of the contract. Often, they’re taken advantage of and are completely unaware that they may not actually have the same legal rights as other homeowners with traditional financing.

What I would like buyers who enter land sale contracts to know is that there are legal defenses to attempts by a seller to evict you. One way to avoid some of the problems is to have an attorney review the contract before you sign it.

Like other contracts, these are negotiable. If a seller is unwilling to negotiate the terms of the deal, you should not enter into the “one-sided” contract.

If you’re involved in a dispute involving a land sale contract, or have a seller attempting to evict you and you need legal assistance, please contact us at the Legal Aid Society at 800-238-1443. You have options, and we can help you find them.

About Marla Williams

Marla Williams is the managing attorney for Legal Aid Society’s Cookeville office and the lead attorney for the organization’s consumer practice. After graduating from the University of Louisville School of Law, she joined Legal Aid Society in 1988. Marla has served on the boards of the Tennessee Bar Association’s Young Lawyer Division, the Tennessee Vocational Training Center, Putnam County Appointed Special Advocates, among others. She has also taught law and paralegal studies at Volunteer State Community College. You can reach her at 931-528-7436.

About Legal Aid Society

Legal Aid Society of Middle Tennessee and the Cumberlands advocates for fairness and justice under the law. The nonprofit law firm offers free civil legal representation and educational programs to help people in its region receive justice, protect their well-being and support opportunities to overcome poverty. It serves 48 counties from offices in Clarksville, Columbia, Cookeville, Gallatin, Murfreesboro, Nashville, Oak Ridge and Tullahoma. Legal Aid Society is funded in part by United Way. Learn more at www.las.org or by following the firm on Facebook.