Friday, August 04, 2017

Use Of Land Contracts In Sale Of Real Estate In Indiana Generally Treated As Outright Sale & Purchase, Equitable Mortgage Requiring Foreclosure, Not Forfeiture, In Event Of Default

In Indianapolis, Indiana, the Indianapolis Star reports:
  • Indiana law has few protections for people who purchase a house with land contract, a shortcoming that consumer and housing advocates say places vulnerable buyers at risk.

    Still, the approach is attractive and increasingly common among individuals and families unable to obtain tradition financing, according to Amy Nelson, executive director of the Fair Housing Center of Central Indiana. That’s because buyers often can get into a contract with little or no money down, followed by affordable monthly payments over a set number of years.

    The gamble is whether the buyer, often financially distressed to begin with, will have the money or be able to obtain a loan when the balloon pay-off comes due. If they can’t — and default — the property reverts to the seller. The buyer walks away with nothing. There is no equity for the money they have paid the seller or improvements that were made.(1)

    Land contracts have been used for decades by individuals selling their homes or land. But recently, Nelson said, they are being used more often by businesses that sell homes in large-scale variations on rent-to-own deals. For instance, an IndyStar investigation found one such seller, Chart Properties LLC, has issued more than 100 contracts to buy and sell homes in a process that is not covered by Indiana’s real estate licensing law.

    Nelson said there should be a cap on how many homes a person or business can sell via contracts without a real estate license, which is required in Indiana to sell property a seller does not own

    “I would hope that maybe … once you are doing so many transactions a year that you would switch from being that mom-and-pop selling your own home, moving and trying to do it yourself, versus somebody who is in the business of so-called selling those homes,” she said.

    Chart President Robert “Bob” Keck explained to IndyStar that he does not need a real estate license because Chart claims ownership of homes it is buying on contract. He said Chart’s attorneys have thoroughly researched their legal standing and the company also has a supporting opinion issued in by the Indiana Attorney General.

    With a growing number of people purchasing homes via contracts — without the protections that come with transactions regulated by real estate licensure laws and mortgages — Nelson said the message is “buyer beware.”

    The central problem with these land installment contract is that they exist in this no-man’s land in between where the potential home buyer has none of the protections of home ownership and none of the protections of being a tenant in a traditional lease,”(2) said Sarah Bolling Mancini, of counsel to the National Consumer Law Center and co-author of a 2016 report that called contract sales “toxic” and “predatory.”
For the story, see Indiana has few protections for those who buy homes with a land contract.
(1) While there may not be any statute in Indiana addressing this point, the Indiana case law makes abundantly clear that, except in two limited circumstances (ie. in the case of an abandoning, absconding vendee, and where the vendee has acquired very little, if any, equity in the property), a sale of real estate on a land contract is treated as an outright sale and purchase, with the payments due on the land contract being treated as payments on an equitable mortgage; and upon default, there is no automatic forfeiture of the property, but rather, the remedy for the seller is to bring a foreclosure action in the same way a traditional mortgage lender forecloses on a mortgage, with the buyer having a corresponding right of redemption.

For a discussion on this principle as it is applied in Indiana, see Skendzel v. Marshall, 261 Ind. 226, 301 NE 2d 641 (Ind. 1973), and the subsequent cases thereunder.
  • This Court has held, consistent with the above notions of equitable ownership, that a land contract, once consummated constitutes a present sale and purchase. The vendor "`has, in effect, exchanged his property for the unconditional obligation of the vendee, the performance of which is secured by the retention of the legal title.'" Stark v. Kreyling, supra, 207 Ind. at 135, 188 N.E. at 682. The Court, in effect, views a conditional land contract as a sale with a security interest in the form of legal title reserved by the vendor. Conceptually, therefore, the retention of the title by the vendor is the same as reserving a lien or mortgage. Realistically, vendor-vendee should be viewed as mortgagee-mortgagor. To conceive of the relationship in different terms is to pay homage to form over substance. See Principles of Equity, Clark, 4th edition, Sec. 9, p. 23.

    The piercing of the transparent distinction between a land contract and a mortgage is not a phenomenon without precedent. In addition to the Stark case, supra, there is an abundance of case law from other jurisdictions which lends credence to the position that a land sales contract is in essence a mortgage: [...]
Editor's Note: It should be noted that while Skendzel v. Marshall was decided over 40 years ago, it appears to continue to be valid case law in Indiana, inasmuch as the case has been cited at least three dozen times by the state supreme court and intermediate appeals court combined since the year 2000.