Guide to Land Contracts in Kentucky

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If you are thinking of buying a house on a land contract, or if you are already making payments on such a contract, here are a few things you should know about this kind of sale.

THE DIFFERENCE BETWEEN A LAND CONTRACT AND A SALE WITH A MORTGAGE

Mortgage Sale

In the most common type of land sale, the Buyer borrows money from a Lender to pay the Seller for the property all at once, getting a deed at the time of sale. Then the Buyer pays back the loan by making payments to the Lender over a number of years.

In such a sale, the Lender takes a mortgage on the property, which means that if the Buyer fails to make payments (that is, the Buyer defaults), the Lender can force a sale of the property. The money from the sale will be applied to the outstanding loan balance.

If the default happens after the Buyer has made many payments, the Buyer will have equity money left over after the property has been re-sold and the Lender paid back. This build-up of equity is what makes buying a home a better deal than renting: The Buyer has something to show for years of payments.

Land Contract

With a land contract, the Buyer does not pay for the property all at once, but in payments. The Seller is also the Lender, and the Buyer does not get a deed to the property until all of the payments have been made. Sometimes getting the seller to turn over the deed after all the payments have been made can be a problem. But the main drawback to land contracts has been what happens when the buyer can't keep up the payments.

It used to be that, under a land contract, if the Buyer defaulted, the Seller could call the sale off and keep all payments made to date, as if the Buyer had simply been renting the property.

In 1979, the Kentucky Supreme Court ruled that a default on a land contract must be treated like a default on a mortgage debt The property must be sold. In other words, a Buyer will not lose everything they have invested if they have gotten close to the end of the payment schedule. The Seller must hold a foreclosure sale and, if the property sells for more than the debt remaining on the property (plus sale expenses) the Buyer must be given the difference.

OTHER THINGS TO KNOW ABOUT LAND CONTRACTS AND INFORMAL SALES OF PROPERTY

Put it in writing. A contract for a sale of land (a real property) must be in writing. If you think you are buying a piece of property but you have no paper showing an agreement for sale, then your contract will probably not hold up in court. Tell the Seller you need a written contract showing what you have agreed upon and how much you have already paid.

Do a title search. Before buying any interest in land, you should check (or have a lawyer check) the property records at the county courthouse to find out if the Seller's interest in the property has been recorded, and if anyone else, besides the Seller, has recorded an interest in the same property. For example:

If back taxes are owed on the property, they will have to be paid to keep the government from someday forcing a sale of the property.

Someone may have gotten a court judgment against the Seller, and put a lien on all property belonging to the Seller. That judgment lien would have to be paid before the Seller could give the Buyer a good deed (a clear title) to the property.

The Seller (or someone who sold to them) may actually have sold the property, or some part of the property, to someone else earlier.

If an interest such as those above has been recorded, you as the Buyer have been legally put on notice and will not be able to complain later that you didn't really know about a problem with title to the land. Therefore it is very important that a title search be done on the property. It may be possible to have the Seller pay for the cost of hiring a professional to do the search.

Understand the terms of sale. Your contract should make it clear which party is to pay the property taxes and insurance costs; exactly what is or is not included in the sale (appliances? outbuildings?); and how much interest you are paying to the Seller.

Understand the condition of the property. It is a good idea to have an inspection done by a professional company that will give you a report about the condition of the property, including things that you may not be able to see, such as roof damage or plumbing problems. If you cannot have an inspection done, ask the Seller in writing to tell you if there is any problem with the property; whether the property lies in a flood plain (or find out for yourself by contacting the Federal Emergency Management Agency (FEMA) Map Service Center at 1-800-358-9616); and whether lead paint has been used on the premises. These are conditions that affect the value of the property and may impose duties on you when you re-sell the property.

The information here is general and is not to be taken as legal advice about your particular case. For legal advice, call your local Lawyer Referral Service or, if you are a low-income person, contact your local legal services program. Senior citizens (60 and older) may obtain free legal advice at 1-800-200-3633, the Legal HelpLine for Older Kentuckians.



Reviewed August 2009