Land Contract With Mortgaged Property

Question: If the bank has a lien on a property, can the owner do a land contract?
I am thinking about doing a land contract. The current owner mentioned that he wants to refinance and then do the land contract. I did some checking and found out that the current owner already has a mortgage out for $28,000.00. I was wondering if the bank has a lien on the property if the current owner can do a land contract. I have heard some horror stories of people doing land contracts and paying the owner and then the owner not paying the bank payment and the bank repo the property leaving the person who signed the contract losing out. Is there anything special that I need to do to protect myself from being scammed?

Answer: You have posed a very good question. Many people sell property on a land contract that is subject to a mortgage. The buyer should be very careful that the mortgage (which always takes priority over the land contract) is for significantly less dollars than the land contract. The form usually used for land contracts in Michigan allows the Land Contract seller to mortgage the property but only up to the amount of the land contract balance and with payments no higher than the land contract payment. This system works great most of the time, but problems can arise where the land contract seller places a mortgage for more money or for a higher payment amount than the land contract would allow. Also, if a land contract seller defaults on a mortgage, then you have rising penalties and interest that go higher than the land contract balance. Because of this, land contract buyers are assuming the risk that the land contract seller will not place to large a mortgage on the property or default on any existing mortgage. A land contract buyer should always have a Memorandum of Land Contract, or the Land Contract itself recorded. Good luck on your transaction. For the above reasons, I recommend that land contract buyers are always represented by an attorney.

Attorney: Mark Miller

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