recorded, all the “escaped taxes” plus penalties and costs become due. Ostensibly, a buyer down the ownership chain could get stuck with all the back taxes. The land sale contract is actually a mortgage, because in effect fee ownership via a deed is not given to the vendee until all sums are paid. Moreover, it is a non-recourse purchase money transaction. The vendee cannot be held responsible for any loss the vendor incurs in the event the vendee defaults. Land sale contracts come both with and without “power of sale” provisions. Those without these provisions do not give the vendee a path to reinstate in the event of a default. With a “power of sale” provision, however, the vendee can reinstate. Both versions can be foreclosed by a judicial foreclosure, but then the vendee has the “right of redemption” to recover the property by paying the principal balance, back interest, and all costs. The duration of this right varies by state, but since the vendee has an “equitable interest” in the property, the vendee has the right to recover if they can.
DISCLOSURE RESPONSIBILITIES
buyer, called “vendee,” receives pos- session and makes payments to the vendor until the vendor is fully paid. The contract is usually not processed through an escrow, recorded at the county, or the receipt of title insur- ance. It is purposely “off the record.” Nobody—competitors, investigators, family and “exes,” creditors, lenders, etc.—are supposed to know of the new ownership. In this case, there are no closing costs either. The Internal Revenue Service considers it a sale when the vendor
receives money from the vendee and delivers possession to the vendee. For the vendor, the sale could be set up as an “installment sale” under IRC 453(b)(1) to defer taxes on capital gains over the term of the contract. (Always seek professional tax advice for matters of this type). Property taxes, on the other hand, are not reassessed upon the sale because the tax assessor is not made aware of the sale by recording of a deed. Down the road, however, when a deed is finally
In California, licensed real estate agents or brokers involved in land sale contract transactions are required to provide vendees with disclosures regarding the use of the land sale contract and the condition of the property. Private parties do not have these disclosure requirements, although making such disclosures is a good idea to avoid disputes. Users of the land sale contract should learn the rules applicable in their state.
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