ARE LAND CONTRACTS AND LEASE OPTIONS LEGALLY ENFORCEABLE?

by Justin Van Den Heuvel

Seems like three decades ago, “cash in hand” and traditional mortgages were the only two methods of buying homes regardless of condition. Deals closed with handshakes, families embarked on their new journey and realtors grew their businesses with Yellow Pages ads, grocery store cork boards and billboard signs. Land contracts were far from popular then.

Long removed from such simplicity is our current interconnected society where within several taps of one’s finger, a real estate transaction is closed – on a telephone. Technology blew the doors off traditional lending and contract law, providing people across the country easy access to homes thousands of miles away and the means to close deals without leaving their living rooms.

It has also created sketchier methods of buying homes, like purchase options (more commonly known as ‘lease-to-own’) and simple land contracts with little legal recourse for some overly trusting buyers.

We look at Michigan contract laws and their applicability to purchase options and land contracts.

Quick Summary of Both Contract Types

Land contracts are simple methods to purchase homes when credit lacks the strength required to purchase through FHA or traditional banks. Usually, the seller will offer their home for so much down, with flat monthly payments that include insurance and taxes. Once the home is paid off, the owner will offer a warranty deed (in rare cases a quitclaim deed) to the buyer, who then is responsible for taxes and insurance moving forward.

Lease options are more complex. The seller will offer a home with a down payment, monthly payment that has insurance and taxes and set the contract to expire in ‘x’ number of months or years. Once the final month approaches, the buyer must either get their own loan, pay cash for the home at its listed price, renew the lease, or walk away with nothing.

So, a seller may put their home out for $50,000 or put a lease option for $75,000 on it over five years. Regardless how much you put toward the home in repairs and payments, your balloon is usually the list price of $50,000 at the end of the option period unless your contract specifies that a certain amount will go toward paying down the home.

In either scenario, home improvements give an owner equity but nothing of value to the buyer until the home is paid in full (unless the contract states otherwise).

Enforcing the Contracts

Courts want unambiguous language in contracts to protect the interests of all parties. As such, each contract must have “considerations”, or benefits, to both parties. Land contracts and lease options must offer “x” in exchange for “y” in a language clearly understood by laymen with an exit route for either party should a breach occur.

Land contracts can offer such unambiguity, whereas lease options are trickier since sellers get money in exchange for a simple lease upfront, then money in exchange for deed later on. Coupled with unpaid back taxes, code violations and other “secrets” often discovered in lease option homes, these contracts become a nightmare for buyer, real estate attorney and court.

Provided language is clear, concise and mutually beneficial, seller and buyer performance is all but guaranteed, and is enforceable under Michigan law. That is, of course, unless either party wishes to take civil action against the other for nonperformance.

If offered a lease option or land contract for real estate on which you wish to reside, contact Van Den Heuvel Law Office in Grand Rapids at 616-698-0000 first.

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