If you are thinking about selling a residence on a land contract to a borrower who will live in the residence, you need to be aware of federal regulations that govern such transactions. The federal regulations were issued under the Dodd-Frank Act, legislation that Congress first enacted in 2010, in response to certain lending practices in the residential mortgage market. Somewhat surprisingly, these federal regulations also apply to the sale of residential property on land contract. Land contracts are often used as an alternative financing mechanism for buyers that cannot get financing through conventional mortgage lending sources.
The new regulations treat anyone who performs the activities related to the origination of a residential mortgage loan as a “mortgage originator” by default. What this means is that sellers who finance their real estate transactions (by a land contract or otherwise) must be a licensed mortgage originator or include a licensed mortgage originator in the transaction. Even though the Act does not specifically state that it covers land contract sales, the regulations enacted afterwards make it clear that Dodd-Frank does govern land contract transactions.
However, land contract sellers may be exempt from these rules if certain criteria are met. First, there is a “one property” exception that applies if the seller only finances one property in a year, is a natural person, an estate or a trust and meets certain other requirements. Balloon payments are allowed, with certain limitations. Importantly, under this exception, the seller does not have to determine and document the borrower’s reasonable ability to repay the loan.
There is a second available exception if the seller provided financing for the sale of no more than three properties in a 12-month period, is a natural person, an estate, a trust or an entity, and meets other requirements. In addition, the loan must be fully paid off after a fixed time period (with no balloon payments). Unlike the “one property” exception, here the seller must make a good faith determination that the borrower has a reasonable ability to repay the loan.
If you do not comply with these requirements, the buyer may be entitled to rescind the transaction and get his or her money back, seek damages and/or be reimbursed for his or her attorney’s fees.
Dodd-Frank does not apply to loans secured by vacant land, commercial properties, rental properties or properties used for investment purposes. The rules also do not apply to residential properties on which the buyer does not intend to reside. Further, Dodd-Frank does not apply to non-consumer buyers, such as corporations, limited liability companies, and partnerships, even if the property being purchased is a residential property.
These regulations (and others) make it important that you consult an attorney that is knowledgeable about land contract financing before you enter into an agreement to sell residential property on a land contract.
Seglund Gabe Pawlak & Groth, PLC
At Seglund Gabe Pawlak & Groth, PLC, we offer a wide range of legal services that pertain to real estate, including the purchase, sale, rental or lease of residential or commercial property. Our attorneys are qualified to represent both the buyers and the sellers in residential and commercial real estate transactions. They have experience in real estate finance and are capable of representing the interests of borrowers and lenders. Our attorneys also represent landlords and tenants in the drafting of lease documents. Our team of attorneys can prepare and review all of the documents that are necessary for a real estate transaction to ensure that everything has been drafted properly to protect your interests. In addition, our attorneys are experienced in litigation involving real estate including all aspects of the purchase, sale, or lease of property.
Seglund Gabe Pawlak & Groth, PLC
28345 Beck Road, Suite 301
Wixom, MI 48393
Phone: (248) 869-0030
Fax: (248) 869-0039