Land contracts, where sellers finance buyers by accepting monthly mortgage payments while retaining the deed, a seller must be prepared to accept the risk that a buyer may default, especially since buyers often have poor credit or limited savings. In years past, sellers could foreclose after only one missed or late payment. Although courts have begun to protect buyers' interests more actively, sellers still have remedies in the event the buyer defaults.
Sellers, called "vendors" in the sale agreement, often prefer to complete a land contract forfeiture instead of foreclosure. The primary goal of forfeiture is to allow the vendee (the buyer) time to bring his payments current. This includes interest and expenses, such as property taxes and insurance. Forfeiture actions are quicker and cheaper to accomplish than foreclosure. In forfeiture, if the vendee is unable to bring his payments current, then he relinquishes ownership and the property is transferred back to the vendor.
Foreclosure differs from forfeiture in that the vendee's entire mortgage balance is made immediately due to the vendor, not just the past due amount. If the vendee cannot find another mortgage, a judgment against the vendee is entered. The home is put up for sale, and the proceeds are used to pay the vendor the amount owed. Foreclosure is expensive and time-consuming. Foreclosure may be a better option if the vendee has been consistently late in paying his mortgage, since forfeiture allows the land contract to continue if the vendee pays her past due amount to bring her payments current. In other words, there is little to prevent the vendee from becoming delinquent again; foreclosure, on the other hand, is permanent.
How to Foreclose
Your attorney will file a foreclosure complaint in your county court. Prepare for the vendee to offer a defense; if she doesn't, a judgment will be levied, and the home will most likely be approved to be sold at a sheriff's sale. Depending on property's location, a set period of time will pass before the home is sold at auction, although the vendee may attempt to pay the balance owed to remain in the home. At the auction, the home is sold to the highest price. Vendors may bid on the property, and are often the only bidder. However, if another party wins the auction, the vendor receives the proceeds.
Before expending time and resources on pursuing expensive legal remedies, first examine how much equity the vendee has paid. Many states will not permit foreclosure action against a vendee who has paid more than 20 or 25 percent of the home's value, so learn your state's laws before attempting to collect via foreclosure. In the past, vendees who had been making timely payments for 15 or 20 years but suddenly found themselves behind wound up losing the entirety of their investment; this is no longer the case. Increasingly, courts are giving more protection to buyers, especially those who have invested a significant sum in the value of the home.
Regardless, invest in good legal counsel and speak with the vendee honestly about the situation. There may be remedies available that you haven't considered. Ideally, a healthy dose of self-preservation and common sense mixed with compassion will help you reach an agreement successfully.
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