contract is unrecorded, so a title insurer will be confused by finding a recorded quitclaim. Second, the vendee has an “equitable interest,” so what do you do with that? The best solution is for the vendor and vendees to go to a title company and discuss the best way to obtain an insurable title for the vendor. With the unrecorded contract, “equitable interest,” and “right of redemption” all hanging out there, this is no time to do it yourself “on the cheap.” The vendor might have to compensate the vendee for some of their equity and pay some transfer expenses to restore a clean title. ALTERNATIVES No financing method is ideal—not even cash. The land sale contract is complicated, because the vendor re- tains fee simple title, yet the vendee enjoys an “equitable interest.” There are two alternatives: NO. 1 Lease-Option. In a lease op- tion arrangement, the buyer leases and gets possession but does not get an “equitable interest.” The buyer can exercise their option to purchase at any time before its expiration. NO. 2 All Inclusive Deed-of-Trust. In this situation, the buyer gets the deed and possession and just owes the seller note payments. No muss, no fuss. If you are interested in reviewing a land sale contract, you can readily find a PDF template on the internet. •
APPLICATIONS/BENEFITS The land sale contract is mostly applied in three instances: • When a lender’s “due-on-sale” clause is being avoided • When a buyer is not lender-qualified, but is trusted enough to enter the transaction
BUYER’S DEFAULT AND FORECLOSURE Under a land sale contract, the vendee is required to make payments to the vendor, pay the property taxes, and keep the property insured (with the vendor included on the policy). Failure to do any of these is a default on the contract, making the property eligible for foreclosure by the vendor. Given the nature of a land sale contract (i.e., a “contract”), foreclosure would be judicial (i.e., through the courts), which is time-consuming and expensive. Including a “power of sale” in the contract can speed up the foreclosure. Even so, the vendee still has the “right of redemption” provided by state law. CONTRACT TERMINATION The alternative contract termination is a quitclaim deed from the vendee to the vendor. Some vendors obtain a quitclaim deed up front and keep it ready to record if the vendee defaults. In other situations, if the vendee is not in default, it can be recorded with the vendee’s permission. There are two problems with this alternative. First, the land sale
• When public notice of the transaction is not desired
DISADVANTAGES Disadvantages arise due to the fact that ownership is retained by the vendor and not transferred by a deed at the time the contract is fully executed. The vendor could over encumber the property, or even sell it without the vendee knowing. These situations would, of course, create a big mess. It is permissible for the vendor to borrow against the property up to the purchase price with the vendee; in so doing, the vendor is just extracting equity and can still fulfill the contract with the vendee. Besides, a vendor who sells the property will have defrauded the vendee.
Bruce Kellogg has been a real estate agent and investor in California for 44 years. He has purchased approximately 350 investment properties for himself,
mostly with high-leverage and tax-deferred exchanges. In the process, he made three fortunes and has experienced three real estate downturns since 1980. Kellogg has transacted roughly 550 properties for clients, creating fortunes for several. His book “Real Estate Investing Wisdom” is currently in publication. He can be reached at Brucekellogg10@gmail.com or (408) 489-0131.
34 | think realty magazine :: may – june 2023
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