March 11, 2021
Part of the American Dream that many Americans hold dear is the dream of home ownership. This dream is even more important during the COVID-19 pandemic when your home is your sanctuary and safe place against exposure. While most West Virginians want to achieve the dream of owning a home, a lot of low-income West Virginians do not have the credit history or the resources to qualify for a mortgage to buy a home. For these West Virginians, renting is often the answer. However, some still want to own a home, and because of this, they enter a land contract to buy a home.
The legal document that we often call a land contract can have multiple names: land contract, installment sales contract, or rent to own agreement. In an ordinary home or land purchase, title to the property is put into a buyer’s name on the date of the sale. However, in a land contract, a Seller agrees to sell a piece of land or a home at a set price with payments spread out over time. The Buyer does not get title to the property until the contract is completed. Because of this, the Seller is protected in case the Buyer does not make all the payments associated with the contract. When full payment of the purchase price is made, the Seller then gives the Buyer a deed transferring legal title to the property. It is in this sense that a land contract differs from a typical mortgage. In a typical mortgage, the Buyer received a Deed of Trust for the property and as payments are made over time, the Buyer gets “equity” in the property. In a land contract, and often to the detriment of Buyers, the Buyer does not get equity in the property because their ownership interest in the property does not come into existence until the contract is completed.
Land contracts often call for a sizable down payment, monthly installment payments over time, and sometimes, a sizable payment at the end called a “balloon payment” which often requires a Buyer to get outside financing to finish the contract. These types of transactions often seem desirable to low-income West Virginians because they typically don’t need independent financing from a bank or other financial institution when the contract is entered by the parties. In a sense, the Seller is acting as a bank by financing the Buyer’s purchase of the property. Though that is true, land contracts have their own pit falls and can often be riskier for Buyers because of the nature of the transaction.
A land contract is often riskier than a mortgage because of less protections for Buyers. In a mortgage, if there is a default by a Buyer because of non-payment or other reasons, the bank must start a foreclosure process that often contains protections that help protect Buyers during the foreclosure process. Because of the nature of a land contract, Buyers in land contracts often do not have any of these foreclosure protections. Also, because Buyers do not obtain title to the property until the land contract is finished, the land contract Buyer often only really owns a “possessory interest” in the property. Further, if there is a default, and dependent on the language of the contract, Buyers are often not entitled to a refund of any money they paid toward the land contract. This includes any monthly payments, sizable down payments, or improvements to the property.
Because of the lack of protections for Buyers and the difference in bargaining power between Sellers and Buyers, land contracts can sometimes become more of a trap for Buyers than a chance to achieve the American Dream of owning a home. If you are thinking of entering into a land contract, installment land sale contract, rent to own contract, or any contract like a land contract, it is in your best interest to seek legal counsel before you sign on the dotted line and fork over your hard-earned money to a Seller. Buying a home should not become a trap for the low-income and less fortunate. Proper legal counsel, especially before you hand over your hard-earned money and sign a contract that lasts for many years, is helpful. If you or a loved one in West Virginia is thinking about entering a land contract, remind them that it is in their best interest to contact Legal Aid of West Virginia to seek assistance in reviewing the contract before you sign on the dotted line.