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land contract illinois

land contract illinois

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Have you ever wondered what people do when they can’t sell a home because buyer’s can’t get financing?  Well there are several options:  1)  Simply Rent the Home until a better Selling Market Materializes  2)  Stay in the home and don’t sell  3)  Surrender the Home through Bankruptcy, Foreclosure, Deed-in-Lieu of Foreclosure or Short-Sale……4) OR the venerable Land Contract.

Good Candidates for a Land Sale Contract:

1)  Beautiful Home that is “just too nice” to rent on a short-term basis
2)  Condominium that is highly desirable but with a condominium association that is in bad shape
3)  Home that cannot be sold for a reasonable price except by waiting five years to sell.

Here’s how it works:  Seller and Buyer Agree on a Price.  A land contract is signed with a closing date.  The date of closing is when all documents are finalized and the first month’s payment is collected and permission is given to the buyer’s to move in.  So what are the terms?  Price, Monthly Payment, Taxes & Repairs, Length of contract, Provisions for Eviction in the Event of a Default.

a.  Price:  This is a lot harder than in a normal sale because you are trying to sell the home for fair market value.  What happens if the value of the home is 40% high at the end of the land contract.  Bottom line:  Windfall for the buyer.  So as a seller you are looking to sell for the highest price possible and hopefully no less than is required to pay for the existing mortgage, taxes, and any other expenses of the home.

b.  Monthly Payment:  This is arrived at by the following formula:  Pay-off less than 20% of value of the home, Apply an interest rate high enough to make sure that less than 20% of the value of the home is paid off.  The monthly payment should also make sure to cover the mortgage, taxes and any other seller responsibility expenses.

c.  Taxes and Repairs:  This is a tricky one – sometimes sellers want to be rid of all responsibility and ask the buyers to pay the taxes, make repairs and sometimes even send in payments directly to the mortgage holder.  This is a bad idea.  As the seller, you want to control all of these aspects to make sure that you don’t have unpaid taxes, mortgage and unfinished repairs.  Bottom line – always assume that in the 59th month the buyer defaults and you take the home back via the simple Illinois Eviction Procedures allowed by statute.  Bottom line: you’ve lost your buyer and basically have five years of a rental.   You want to make sure you haven’t lost anything in the value of your home.

d.  Length of Contract.  The Land Contract Cannot be more than 60 months long.  Why?  Because if it is longer than 60 months, the defaulting buyer has to be evicted using foreclosure proceedings which take 9 to 14 months.  Whereas if the contract is 60 months or less, the defaulting buyer’s can be removed in less than 3 months under eviction law.

What happens at the end of the contract, the buyers typically have one month to close on a purchase of the home for the amount of the purchase price that is left.  So what if the buyer can’t purchase the home?  New Land Contract or they leave and new purchasers are found.  Why is so this so amazing?  Because if the buyers default but made 60 months of “rent” payments and kept the home in good shape, you have an opportunity to sell your house in a different and possibly better market at a higher price even though you had a 60 month “lease” where you were paid above average rent.

e.  Provisions for Default – this is the most important issue and is generally regulated by statute and case law except in the determination of what constitutes a default.  It is very important to adequately define what constitutes a default.

How much does it cost to do a land contract transaction?  About the same as an ordinary sale, but the fees are spent in different areas.  Here is a comparison

In a typical sale transaction for a $200,000 home:

a.  Attorney  $700
b.  Title:  $1500
c.  Other seller charges $1000

In a typical land sale contract:

a.  Attorney $2500
b.  Title:  Possibly No Expense
c..  Other seller charges:  $500

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