By: Dustin Humphrey
If you are a landowner, understanding the difference between a contract for deed and a regular mortgage sale is vital – especially in the state of Kentucky. Far too many times, our office sees clients that misunderstand a contract for deed, which can cost landowners quite a bit of money. The attorneys at Skeeters, Bennett, Wilson & Pike don’t want this to be you.
Read the following Q&A to learn how you can avoid this costly mistake.
Q: What is a mortgage sale?
A: A mortgage sale is the most common type of land sale, in which the buyer borrows money from a lender to pay the seller for the property all at once. This allows them to get the deed at the time of the sale, followed by the buyer paying back the loan over a number of years. A mortgage is taken by the lender to secure payment of the loan.
Q: What is contract for deed?
A: Unlike a mortgage sale, a contract for deed, or a land contract, does not require the buyer to pay all at once; rather he or she makes payment on the property. This is the classic “rent to own” scenario. Once all payments have been made, the buyer owns the property.
Q: What is the main drawback of entering a land contract?
A: Issues mainly arise when the buyer is unable to keep up with their payments.
Q: As a landowner, how do I evict someone who has gotten behind on his or her payments?
A: This is where our attorneys see the biggest mistake. Put simply: You can’t evict the buyer under a land contract. The Kentucky Supreme Court has ruled that a default on a land contract must be treated like a default on a mortgage debt. In other words, the owner must file a foreclosure action and the property will be sold at a judicial auction. This is a time consuming and costly process. Often, our attorneys find that owners selling by land contract are shocked to find they cannot evict and must foreclose.
In conclusion, if you enter a contract for deed with a buyer, remember that he or she is not considered a “renter” that can simply be evicted in the case they stop making payments. The law says that a person buying a property on contract for deed acquires a legal interest in the property that can only be terminated through the foreclosure process. An eviction proceeding is a quick, summary process whereas a foreclosure is an expensive civil lawsuit filed in circuit court that can last from 6 months to a year and results in the property being sold at a judicial sale.
Make sure you understand contract for deed if you are landowner. Failing to do so can be an expensive mistake to make!
Dustin joined the SBW&P team in 2010, coming to us from one of the oldest firms in Cincinnati. He earned his undergraduate degree from Bellarmine University, summa cum laude, and his law degree from the Salmon P. Chase College of Law at Northern Kentucky University, where he graduated cum laude. Dustin’s law practice includes personal injury law, medical malpractice law, business law including corporations, LLCs and business planning, real estate law, probate law, estate planning, employment law, and family law.