A forfeiture clause in an installment land contract is not always what it looks like on paper

Take a case: 12 acres, gently rolling, edge of a small town about 40 minutes from a metro. Bought at $16,500 from an absentee owner, sold on an installment contract at $27,500 with $2,000 down, 9.5 percent over 120 months, payment about $330. Six payments arrive on time. Then nothing. The contract carries the clause most templates carry: 30 days to cure, then the contract terminates and the buyer forfeits payments made and any interest in the property. Notice goes out on day 35, with the seller assuming possession returns within a couple of months. What often gets missed is that in some states, an installment land contract where the buyer has paid a meaningful amount can be treated closer to a mortgage, which means a judicial process rather than a simple declaration that the contract is over. How much equity triggers that treatment, and what the process looks like, both vary by state, and some states run slower than others. So the clause can be enforceable in the sense that it's written down and unenforceable in the sense that a judge decides the timeline. In a case like this, thirteen months and several thousand dollars in legal fees is not an unusual outcome. Property can come back damaged, with unpaid taxes attached if they were never escrowed into the payment. The lesson: ask an attorney licensed in that state what the actual remedy timeline is before the first contract is signed, size the down payment against that timeline, and collect taxes inside the monthly payment so a default doesn't arrive with a tax bill attached.

tylerbrooks9 AO1APRO 10

Answer

priya_n21 PB2BPRO 21

The remedy timeline is not what cost you the thirteen months. The $2,000 down is. $2,000 on $27,500 is about 7%. A buyer with 7% in and six payments made has roughly $4,000 of skin in a parcel he has decided he does not want. Walking away is cheap for him, and it stays cheap no matter what the default clause says. Your resale at $6,000 down on $24,000 is 25%, and that buyer has to think much harder before he stops answering the phone. Same land, different behavior, because you changed the number that matters. The legal process only became your problem because a default happened at all. Better down payment selection reduces how often you find out what your state's foreclosure timeline feels like. In some states you can also pick the remedy path depending on whether you use a contract for deed or deed the property and take back a recorded mortgage or deed of trust, so that is a question for the attorney at structuring time rather than at default time. Consider the near miss version of this: $1,500 down on an $18,000 parcel to a buyer who volunteers that he is between jobs. He pays for four months and goes silent, and the only reason it does not become your story is that his brother wants the parcel and assumes the contract. That is luck, and luck is not a policy. Verity, did you consider taking less price for more down on the original sale? A premium price with thin down is a premium you may never collect.

priya_n21 PB2BPRO 21

2 replies

diane_kowalskiServicePRO

The $700 of taxes is the part that surprised me most, because it is small and it is the one thing you could have controlled entirely with one line in the payment. I have been reading templates for a couple of months and none of the ones I have seen even mention who pays the county.

diane_kowalskiServicePRO

Reply Anonymous