A land contract in Michigan is a seller-financed home purchase: the buyer moves in and starts making payments directly to the seller, while the seller keeps the legal title as security until the final payment clears. The buyer picks up what the law calls equitable title on day one, which carries most of the responsibilities of ownership, but the deed does not change hands until the contract is paid off. These deals give buyers who cannot qualify for a bank mortgage a path to homeownership, and they let sellers earn interest on the sale price. They also carry legal requirements and risks on both sides that a standard home sale does not.
The Contract Has To Be in Writing
Michigan’s Statute of Frauds voids any agreement to sell an interest in land unless it is in writing and signed by the party making the sale.1Michigan Legislature. Michigan Compiled Laws 566.108 – Statute of Frauds Contract for Interest in Lands A verbal promise is not enforceable, no matter how much the buyer has already paid. Both parties should sign, and the document needs to spell out the purchase price, interest rate, payment schedule, property description, and who is responsible for taxes and insurance.
The seller is also required to give the buyer a copy of the signed contract. Beyond the copy itself, the contract should describe what happens if either side defaults, including any late fees, notice requirements, and the seller’s remedies.
How High the Interest Rate Can Go
Michigan’s default legal interest rate is 5% per year.2Michigan Legislature. Michigan Compiled Laws 438.31 – Legal Interest Rate Parties can agree in writing to something higher, but the ceiling depends on who is selling. Licensed lenders like banks and credit unions can charge market rates on land contracts secured by a first lien. Individual sellers and other unlicensed vendors are capped at 11% per year, and that 11% ceiling includes all finance charges, not just the stated rate.3Michigan Legislature. Michigan Compiled Laws 438.31c – Interest Rates on Land Contracts and Real Property Loans Any provision that goes above the applicable cap is unenforceable, and a buyer can challenge the excess in court.
Recording With the Register of Deeds
A land contract is not invalid simply because no one records it, but recording with the county register of deeds where the property sits is one of the most protective steps a buyer can take. Recording puts the world on notice that the buyer has an interest in the property. Without it, a judgment creditor of the seller, or a later buyer who has no idea the contract exists, could claim an interest that competes with the buyer’s.
Michigan sets formatting standards a document must meet to be accepted for recording, covering type size, paper, margins, ink color, and printed signer names.4Michigan Legislature. Michigan Compiled Laws 565.201 – Recording Requirements for Instruments Recording fees vary by county. Do not wait for the seller to record; take care of it promptly after signing.
Who Owes What During the Contract
Equitable title gives the buyer the right to possess, use, and improve the property as if they owned it. Legal title stays with the seller as security, roughly the way a bank holds a mortgage. When the final payment is made, the seller must deliver a warranty deed transferring full legal title.
In practical terms, the buyer picks up almost all the burdens of ownership. Land contracts nearly always make the buyer responsible for property taxes, homeowners insurance, and maintenance. Falling behind on property taxes creates a lien that can jeopardize the whole path to ownership, and in a worst case the county can sell the property at a tax auction. Treat property taxes as seriously as the monthly payment itself.
The seller has an obligation of its own: keeping the title clean. New debt secured by the property, or existing liens the seller lets grow, puts the buyer’s equitable interest at risk. That risk shows up most sharply when the seller has never paid off their original mortgage.
The Due-on-Sale Trap
If the seller still has a mortgage on the property, entering into a land contract can trigger the mortgage’s due-on-sale clause. Federal law lets the lender demand full repayment of the remaining balance whenever the property is sold or transferred, and a land contract counts.5Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions The Garn-St. Germain exceptions for inheritance, divorce, and certain living-trust transfers do not cover land contract sales.
Here is the danger. If the lender calls the loan and the seller cannot pay it off, the lender can foreclose. The buyer keeps paying the seller, the mortgage still goes unpaid, and the lender’s foreclosure wipes out the buyer’s interest. The buyer has no direct relationship with the lender and little recourse once foreclosure starts.
Ask before signing whether the seller has an existing mortgage. If they do, consider contract language that requires the seller to keep it current, or an escrow arrangement that routes payments to the mortgage first. And record the contract, so at minimum the buyer’s interest is on the public record.
Federal Rules That Apply to Seller-Financed Sales
Dodd-Frank Seller Financing
Federal regulations treat a seller who finances a sale as a loan originator unless the seller fits an exemption. Two safe harbors matter for most Michigan deals. The narrower one covers a natural person, estate, or trust that finances only one sale in any 12-month period, owns the property being sold, and structures the loan so it does not result in negative amortization.6eCFR. 12 CFR 1026.36 – Prohibited Acts or Practices in Connection With Credit Secured by a Dwelling
The broader exemption covers up to three financed sales per year, but with stricter conditions: fully amortizing loan with no balloon payments, a fixed rate or an adjustable rate that only adjusts after five years with reasonable caps, and a good-faith determination that the buyer can afford the payments.6eCFR. 12 CFR 1026.36 – Prohibited Acts or Practices in Connection With Credit Secured by a Dwelling Sellers who exceed three financed sales in a year, or who fail these conditions, are treated as loan originators and have to comply with federal licensing and disclosure requirements.
Lead Paint Disclosure on Older Homes
For any residential property built before 1978, federal law requires the seller to disclose known lead-based paint hazards, provide an EPA-approved lead hazard pamphlet, share any inspection reports on hand, and give the buyer 10 days to arrange a lead paint inspection before the contract becomes binding.7eCFR. 24 CFR Part 35 Subpart A – Disclosure of Known Lead-Based Paint Hazards The buyer can waive the inspection window in writing, or the parties can agree to a different length of time. Both sides sign a lead warning statement attached to the contract, and the seller must keep the disclosure documents for at least three years.
Balloon Payments
Many Michigan land contracts include a balloon payment, a large lump sum due at the end of the term after a stretch of smaller monthly payments. Balloons keep the monthly cost low and give the buyer time to line up traditional financing for the remaining balance. The risk is obvious: if that refinance does not come together, the buyer can lose the property.
Federal rules limit where balloon payments can appear.8Consumer Financial Protection Bureau. What Is a Balloon Payment? When Is One Allowed? A seller using the three-property Dodd-Frank exemption cannot use a balloon at all; the financing has to be fully amortizing. A seller using the one-property exemption has more flexibility, but the loan still cannot result in negative amortization. If your contract has a balloon, mark the due date and start planning the refinance well before it arrives.
What Happens if the Buyer Defaults
Forfeiture
When a buyer stops paying or breaches another material term, the seller’s first option is usually forfeiture, a streamlined process for reclaiming the property that skips full foreclosure. Forfeiture is only available if the contract itself expressly gives the seller the right to declare one.9Michigan State Housing Development Authority. Land Contract – Forfeiture and Timeline
It starts with a written notice served on the buyer. That notice identifies the parties, contract date, and property, lays out the unpaid amounts and when they were due, lists any other breaches, and declares that forfeiture takes effect in 15 days (or a longer period if the contract sets one) unless the buyer cures.10Michigan Legislature. Michigan Compiled Laws 600.5728 – Notice of Forfeiture Requirements Paying the past-due amounts and fixing any other breaches inside that window saves the deal.
If the buyer does not cure and the seller sues, the buyer still gets a redemption period after the court’s judgment before losing the property:
- Less than 50% of the purchase price paid: 90 days after judgment.
- 50% or more paid: 180 days after judgment.
The tradeoff for the seller is that forfeiture takes back the property but wipes out any remaining balance owed. Every payment the buyer made stays with the seller, but the unpaid portion is extinguished. For a seller owed a lot, that is a bad remedy.
Judicial Foreclosure
A seller who wants both the property and the unpaid debt has to go through judicial foreclosure in the circuit court.11Michigan Legislature. Michigan Compiled Laws 600.3101 – Circuit Court Jurisdiction Over Foreclosure This is a full lawsuit. The court oversees the process, the property is sold at public auction, and the proceeds go toward the buyer’s remaining debt. If the sale price exceeds what is owed, the surplus goes to the buyer. The buyer has a six-month redemption period after the foreclosure sale, during which the property can be reclaimed by paying the sale price plus costs. Foreclosure takes longer and costs more than forfeiture, which is why most sellers try forfeiture first and reserve foreclosure for deals with a large remaining balance.
Tax Treatment
Buyer
Because the buyer holds equitable title and shoulders the ownership costs, the buyer is typically the one who pays property taxes during the contract term. A tax lien from unpaid property taxes takes priority over most other interests in the property, including the buyer’s equitable title. Buyers may also be able to deduct the interest portion of their land contract payments on their federal return, similar to how mortgage interest is deducted, depending on whether they itemize and other individual tax factors.
Seller
The IRS treats a land contract as an installment sale, because the seller collects at least one payment after the tax year the sale occurs. Under the installment method, the seller reports only the profit portion of each year’s payments, not the return of their original investment.12Office of the Law Revision Counsel. 26 USC 453 – Installment Method That spreads the tax across the contract term instead of piling it into the year of sale.
Sellers report installment sale income on IRS Form 6252 each year they receive payments.13Internal Revenue Service. Topic No. 705 – Installment Sales Interest collected is taxed separately as ordinary income. Sellers who receive $600 or more in mortgage interest during the year in the course of a trade or business also file Form 1098 to report that interest.14Internal Revenue Service. About Form 1098 – Mortgage Interest Statement A seller can elect out of the installment method and report all the gain in the year of sale, but most prefer to spread it out and keep the annual tax bracket down.