Seller Financing: Articles of Agreement 

 Posted on October 10, 2022 in Real Estate

Aurora and Plainfield Real Estate Lawyers for Articles of Agreement

Articles of Agreement are known for their installment land contract, which usually requires two closings. Articles of Agreement are also land as “Land Sale Contract” or “Articles for Deed” or “Rent to Own” Installment Contracts. Going forward, we are going to refer to Articles of Agreement to describe seller financing and installment contracts. The benefit of seller’s financing is ability to avoid commercial lending requirements such as debt to equity ratios and poor credit scores.

Installment Contracts

An installment contract is a method of establishing a real estate transaction, which is an alternative to traditional mortgage financing. Under the installment contract, the buyer is essentially a “renter” with the ability to acquire an ownership interest in the future. An installment contract also involves an option to purchase. An option to purchase is the ability of the buyer to obtain traditional mortgage financing within certain time limitations. Furthermore, the buyer must also maintain a healthy renter and owner relationship. 

An Articles of Agreement establishes a security interest, which must be addressed when one wants to sell a house or real estate. As a security interest, it is effective according to the terms of the parties, against the purchasers of the collateral, and against creditors. 810 ILCS 5/9-201(a). The buyer will establish equitable conversion in the property upon signing. 

Often, we see that a buyer has defaulted on the installment contract and the seller has failed to adequately protect their interests in the property (owned by the landlord). When the landlord or seller wants to sell the property, they must acquire a release or show that the buyer’s legal interest has been released. An eviction and court order are essential to show that the buyer’s interest has been released and no longer subject to the interests.

Proper drafting of the installment contract is essential. An installment sale agreement or otherwise known as the articles of agreement shall state that possession of the premises by the seller shall be presumed that the security interest is released by the buyer. Often, a default in the terms of the installment sale is considered a breach of contract. The Seller must also include a time is of the essence clause because the equitable interest in the property must be released because the buyer has obtained legal interest in the property upon signing of the articles of agreement.

Unlike traditional lender financing, the seller maintains legal interest or title in the property until the final closing where the buyer pays of the equitable interests, or the contract based upon the terms of the articles of agreement. Upon signing of the legal document, the buyer will assume possession of the property, but lack legal title until they have satisfied the legal terms of the articles of agreement. 

A major drawback of an articles of agreement or an installment sales contract is the lack of protection for the buyer. Unlike a lender financing deal, an installment sales contract lacks a redemption period, which enables a time frame for the buyer to re-acquire the right to fulfill the legal terms of the articles of agreement. Moreover, a traditional mortgage requires a foreclosure proceeding unlike a land sale contract. With a land sale contract or articles of agreement, the seller (or landlord) may initiate a renter eviction proceeding against the buyer (in most instances).

A major benefit for landlords is the ability to initiate a rental eviction unlike a foreclosure. Land sale contracts only require a foreclosure proceeding when the buyer has obtained twenty percent of equity in the property. Foreclosure laws in the State of Illinois entered after July 1, 1987, require payments for at least five (5) years. The total unpaid balance must be “less than 80 percent of the original purchase price of the real estate.

Sellers must be careful because a land sale contract or otherwise known as an “article of agreement” or “articles of deed”, may require a quit title lawsuit. The purpose of the quit title lawsuit is to eliminate the cloud over legal title with the buyer’s default of the installment sales contract. Thus, the buyer will maintain an interest in the contract because installment sales contract is the equivalent of recording of a deed. Therefore, a release of the buyer’s interest is necessary to complete the sale of the property. A forcible entry and detainer eviction action also is an excellent way to terminate a buyer’s equitable interest in real estate. The key here is to prove that the buyer’s interest to the property has been terminated. The court order also should state if possible that the buyer’s equitable interest in the real estate has been terminated. In contrast, the installment sales contract is no longer enforced because the buyer has breached the terms of the installment sales contract.

Tax Benefits of Installment Agreements

A major benefit to a seller or landlord is the ability to obtain installment payments over a period. In many instances, a landlord will make a higher sales price than traditional mortgage financing without the legal risks of a traditional mortgage. Finding a purchaser interested in an article of agreement is much easier than finding a qualified buyer to purchase a mortgage. The installment sales will minimize capital gains tax concerns.

The buyer gets the immediate real estate tax benefits of ownership under a land sale contract.  The payment of real estate taxes is a major issue in a land sales contract. The seller should still be the owner of record for real estate tax purposes with county treasurer’s office. Often, the buyer will assume the payments of the seller and will pre-pay monthly the real estate taxes. In situations where the seller does not have a mortgage, then the buyer is responsible for payment of the real estate taxes. Failure to timely pay real estate taxes should be a default term in the articles of agreement or installment sales contract. 

Title Insurance

The final step of the articles of agreement involves a traditional closing where the buyer will assume legal title of the property. A seller’s attorney is required to perform the real estate closing and clear all the encumbrances to title. Title insurance is often required in the installment sales contract as well as a survey showing any encumbrances such as easements, building setback lines, and other restrictions on the property.

Plainfield and Kendall County Real Estate Attorneys for Articles of Agreement

As real estate lawyers, the attorneys of Landlord Evictions LLC conduct real estate closings throughout the suburbs of Chicago and the City of Chicago. Landlord Evictions LLC concentrates in representing property owners, real estate investors, and landlords. Real estate lawyers handle the complex contract requirements and legal considerations required when seller financing is established. Hiring qualified and experienced legal counsel is critical because real estate transactions are complicated and complex. The seller must be careful to handle their real estate interests with precision or otherwise their ability to sell or refinance the property will be jeopardized. Our attorneys handle real estate closings and articles of deed around Plainfield, Aurora, Sugar Grove, Yorkville, Oswego, Plano, Kendall County, Will County, DuPage County, Naperville, Grundy County, LaSalle County, Sandwich, Somonauk, and Montgomery among many other areas. Call us at 630-780-1034.