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Should I consider offering an installment contract?

QUESTION:

We know someone who would like to buy our home but they don’t have enough down payment to qualify for a bank loan. The existing mortgage on our house has a paragraph that says we can’t sell without our present lender’s consent. Therefore, we would like to do an installment contract with these buyers. If they don’t accumulate enough to qualify for a new loan, then we would cancel the contract. Do you foresee any problem with this?

ANSWER:

An Agreement for Deed is also referred to as an installment land contract or a contract for deed. It documents a sale of land and the obligation of the owner to convey the land after the buyer has met his obligation to pay the purchase price in installments over a period of time. In Florida, Agreements for Deed are treated by the courts as mortgages.

If your buyer fails to accumulate the required monies to meet the terms of your agreement, the agreement can be canceled by mutual written agreement. It is more likely, however, that a buyer would be unwilling to "give up" and agree to a cancellation.

Many owners that consider an Agreement for Deed are under a belief that they do not need to go to court to cancel a breached agreement, especially if it is not recorded. This is not so.

If the buyer defaults under your Agreement for Deed, you will be required to commence foreclosure to regain full title to your home. Also, an Agreement for Deed can sometimes present more issues to be litigated then would a simple note and mortgage. This, of course, can be costly and time-consuming. But, if you know this going into the deal and you weigh the various risk factors, an Agreement for Deed might be the right tool for accomplishing your respective needs and goals.

You mentioned, however, that your existing lender’s mortgage contains a clause restricting your right to sell without your lender’s consent. This is commonly referred to as a "Due-on-Sale Clause."

Such clauses, if held valid, will allow your lender to declare a breach and accelerate your debt, i.e., call the entire loan due and payable when you transfer without your lender’s consent. Usually the lender finds out about the transfer through one or more ways including insurance change notification or the yearly tax notices or payments coming from the new owner or occupier.

An Agreement for Deed is a type of transfer that will trigger a "Due on Sale" clause. This means the lender could foreclose unless it is paid off in full. So it would be wise for you to consider the rights of your existing lender before entering into an Agreement for Deed.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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