Since the last housing crisis, home buyers have found that qualifying for a mortgage loan keeps getting harder. The high cost of housing in the Flathead Valley adds to this dilemma. A search of online classifieds shows more people seeking and offering owner financing. The concept seems great: the owner of the property finances the purchase instead of a big bank. However, proceed with caution, because these deals can be too good to be true.
Owner financing arrangements are also known as contracts for deed, bonds for deed, land contracts, or land installment contracts. A contract for deed is a different legal concept than a purchase money mortgage. Although the two share certain similarities, the legislature intended to distinguish between a mortgage and a purchaser under a contract for deed.
A mortgage is defined in Mont. Code Ann. § 71-1-101 as a contract by which specific property is hypothecated for the performance of an act, without the necessity of a change of possession.
A purchaser under a contract for deed is described in Mont. Code Ann. § 70-20-115. It is any person who has entered into a contract with the record owner of real property in which the record owner agrees to deliver the deed to the purchaser when certain conditions have been met, such as completion of payments by the purchaser, and who has recorded the contract or an abstract of the contract in accordance with Title 70, chapter 21. It also includes any assignee or successor of that person, if the assignee or successor has also recorded the contract or an abstract of it. Aveco Properties v. Nicholson, 229 Mont. 417, 418.
Typically, the buyer agrees to pay the purchase price in monthly installments. The seller keeps legal title to the property until the contract is completed. The issue is that these contracts often contain forfeiture clauses. These clauses may say that if the buyer is late on a payment, the property, and all payments the buyer has made, are forfeited. There are some defenses to this. If there is a forfeiture, the buyer may have the option to pay the entire balance owed in full. But this is not an ideal situation to be in, and many horror stories arise from these scenarios. See Mont. Code Ann. § 71-1-201; Parrott v. Heller (1976), 171 Mont. 212, 214, 557 P.2d 819, 820.
On the flip side, forfeiture clauses give significant protection to sellers who offer owner financing. And even a savvy buyer who knows the risks may decide the reward of a house is too great to pass up.
If you are considering an owner financing agreement, or are already in a dispute over one, set up an appointment with the attorneys at diStefano & Mattingley, PLLP. The best contract is one agreed to by two parties who both know what they are signing. Whether you need help making sure a contract gives you adequate protection, or you need to discuss remedies and defenses, our attorneys can help.