Land Contracts in Michigan: What Buyers and Sellers Should Know

A land contract lets a buyer purchase property over time by paying the seller directly instead of borrowing from a bank. In Metro Detroit, land contracts show up in home sales, small rental properties and commercial buildings alike. They can work well for both sides, but they carry risks that a conventional mortgage closing would catch. Here is what buyers and sellers should understand before signing one.

How a Land Contract Works

In a typical land contract, the buyer makes a down payment, moves into or takes control of the property and pays the seller in installments of principal and interest. Many contracts end with a balloon payment, when the buyer refinances with a bank or pays off the balance.

Until the price is paid in full, the seller keeps legal title. The buyer holds what Michigan law calls equitable title: the right to receive full ownership once the contract is paid. Because a land contract is a contract for the sale of land, Michigan’s statute of frauds requires it to be in writing and signed by the seller.

Michigan also limits the interest rate on land contracts. According to Michigan Legal Help, the rate may change over time, but its average must be 11 percent or less.

Why Buyers and Sellers Use Them

Buyers often choose land contracts when they cannot yet qualify for a traditional mortgage or want a faster, simpler purchase. Sellers use them to reach more buyers, earn interest on the balance and spread out the sale proceeds. For an older building or a property that needs work, a land contract may be the only realistic way to complete a sale.

What Buyers Should Check

• Title. Search the county register of deeds before signing. Confirm the seller owns the property and look for mortgages, liens and unpaid taxes.
• Recording. Record the land contract or a memorandum of it with the register of deeds to put the world on notice of your interest.
• Condition. Get an inspection. Most land contracts make the buyer responsible for repairs.
• Taxes and insurance. Most contracts make the buyer pay property taxes and insurance. Know who pays them and how payment is proven.
• The seller’s mortgage. If the seller still owes a bank, ask what happens if the seller stops paying. Be cautious about subordination clauses that put someone else’s interest ahead of yours.
• The balloon. Have a realistic plan to refinance or pay the balance when it comes due.

What Sellers Should Check

• Your own loan. Many mortgages allow the lender to demand full payment if the property is sold. Review yours before offering a land contract.
• The buyer. Screen the buyer as a lender would. You are financing the sale.
• Default remedies. Make sure the contract expressly provides for forfeiture and acceleration if you want those options.
• Protection of the property. Require insurance that protects your interest, proof of tax payments and limits on alterations without consent.

When the Buyer Stops Paying

Michigan gives sellers two main remedies: forfeiture and foreclosure. Which one fits depends on the contract and on how much the buyer has paid.

Forfeiture

Forfeiture is available only if the contract expressly provides for termination or forfeiture. The seller serves a written notice of forfeiture, and the Michigan court form for that notice provides a cure period of 15 days unless the parties agreed to a longer time. If the buyer does not cure, the seller may file in district court to recover possession. Amounts that are due only because the debt was accelerated do not count as missed payments for a forfeiture case.

If the seller wins, the buyer still has a redemption period to pay what the judgment requires: 90 days if the buyer has paid less than 50 percent of the purchase price, and six months if the buyer has paid 50 percent or more. The seller cannot evict until that period ends.

Foreclosure

A seller can instead foreclose, much like a mortgage lender. Land contract foreclosure must go through circuit court, not foreclosure by advertisement. The court orders a sheriff’s sale, and the buyer generally has a six-month redemption period after the sale. If the sale brings less than the balance owed, the buyer may owe the difference.

When the Seller Does Not Deliver

The most common seller breach is refusing to deliver a deed after the buyer pays in full. In that case the buyer can ask the circuit court to quiet title in the buyer’s name. Buyers also run into trouble when a seller lets an underlying mortgage or property taxes go unpaid, which is one more reason to record the contract and monitor the property’s records.

Paying Off the Contract

When the balance is paid, the seller signs a deed to the buyer. The buyer should record it promptly with the register of deeds and consider an owner’s title insurance policy. Buyers should also ask the local assessor about any property tax filings that a change of ownership requires.

We draft land contracts for sellers and buyers and handle forfeiture and foreclosure when payments stop. Learn more about our land contract work, or request a consultation.

Frequently Asked Questions

Sources

• Michigan Legal Help, An Overview of Land Contracts
• Michigan Legislature, MCL 600.5726 (recovery of possession after land contract forfeiture)
• Michigan Courts, Form DC 101: Forfeiture Notice, Land Contract
• Michigan Legislature, MCL 566.108 (statute of frauds, sales of land)
• Michigan Legislature, MCL 600.2932 (action to determine interests in land)

This article is general information about Michigan law, not legal advice. Every land contract is different, so have yours reviewed before signing.

This article is general information about Michigan law, not legal advice for your situation. Reading it does not create an attorney-client relationship.