Clause 14 forfeits everything after 30 days late

An operator I've been talking to sent me the template he uses for his owner-financed land sales so I could see how the deal works before I put money anywhere near it. I read documents for a living in the sense that I read the ones other people skip, and this one has me stuck at the top of page four.

Setup for anyone new to the term: a contract for deed, sometimes called a land contract or installment contract, is where the seller keeps legal title to the property and the buyer pays monthly. The buyer gets the deed only when the last payment clears. It's how a lot of rural land gets sold, because banks generally don't lend on raw ground, so the seller becomes the lender.

Clause 14 says if a payment is more than 30 days late the contract terminates, the buyer's interest ends, and every dollar paid to date is retained by the seller as liquidated damages. On a parcel where somebody has paid $3,000 down and 26 months at $410, that's about $13,600 gone.

The operator says that's standard and he's never had to use it. What I don't know is whether a clause like that is enforceable as written, or whether a court would treat a buyer with that much equity as having something closer to a mortgage that needs a real foreclosure.

So the decision on my desk is small but concrete. Do I ask him to change the clause, or do I ask him what his lawyer said about it and see whether he has an answer? I'd rather know what a good version of this clause looks like before I open my mouth.

4 replies

1carlos_nunezActive

How forfeiture clauses hold up is very state specific. Some states have statutes that spell out a notice and cure process for land contracts and set a period after which the buyer's paid-in equity gets protection, others let forfeiture run closer to what your clause says, and some treat a land contract with substantial equity as requiring judicial foreclosure. There are also states where recording the buyer's interest changes what you have to do to clear title afterward. You need a real estate attorney in the state where the dirt is, and if he operates in three states he needs three answers.

The practical version I've seen on deals in progress is a clause with a 15 or 30 day grace, a written notice of default, a 30 to 60 day cure period, and a partial refund or a right to reinstate once equity passes some threshold. It costs the seller very little and it makes the document survive contact with a judge.

0devon_pierce Get yoursPRO5

There's a business reason to soften it too, separate from whether it's enforceable. A buyer reading clause 14 during the walkthrough is a buyer who might not sign. I'm building my list and every rural seller-financed listing I've saved that shows terms up front has softer default language in the ad copy than in the actual contract, which tells me the sellers know the clause scares people.

1ryanmck27SC2C

@fathom the other thing on page four of most of these is who pays the property taxes during the contract term. If the buyer is supposed to pay them directly and doesn't, the seller finds out when the delinquency notice arrives on a parcel that's still in the seller's name. Ask whether he escrows taxes or just trusts the buyer, because that answer tells you as much about the operation as the forfeiture clause does.

Clause 14 forfeits everything after 30 days late

4 replies