The land-contract gamble

DEAR BENNY: I sold a home in 2006 by way of a land contract. The buyers were making payments to me in order to pay down the purchase price. Recently, the buyers quitclaimed (in lieu of foreclosure) the property back to me. They said they lost their jobs. I received a letter from a mortgage company this week. They are applying for a new home. Any recourse I can take? The property has lost a lot of value in the past year. --Nancy

DEAR NANCY: As I understand your question, you entered into a land contract -- also known as a "contract for deed" or a "land installment sales contract." Under this kind of arrangement, you kept title to the property and your buyers made monthly payments. When they were able to pay off the balance owed you -- either by way of getting a new loan or winning a lottery -- you would then give them the deed to the property, which would then be recorded in their name.

I am not sure what you mean by quitclaim, because in the land sales contract deals that I do for clients, the deed is not recorded at the beginning of the transaction. In any event, when they gave the property back to you, did you sign a release?

I suspect that unless you have other documents indicating that they still owe you money, a court of law would consider the monthly payments they made to you as rent, and they would owe you nothing. You now have the house. Would you be complaining if the market value had increased? You made your decision to take a risk with the land contract, and unfortunately you lost.

When a person enters into a land sales contract arrangement, the IRS treats that as a sale for tax purposes. You should consult your financial advisors to determine how to treat this transaction.

DEAR BENNY: I have an offer to trade my $900,000 residence for a $600,000 residence plus $300,000 cash. We each have a real estate agent, and so far they have not been able to tell us how to handle the commission. Can you advise me how the commission is typically handled and what the options are? --Steve

DEAR STEVE: Real estate commissions are negotiable, as is everything else in real estate. If the real estate agents actually were involved in finding the exchange property, then they are entitled to a commission.

I am surprised that they are unable to give you advice. But since that's the case, I suggest that you and the other person with whom you are exchanging the property sit down and reach an agreement among yourselves.

Your agent is entitled to a commission based on the $900,000 sales price, and it would appear to me that the other agent is entitled to a commission based on a $600,000 purchase price.

I suggest that you give your agent 2 percent of $900,000 and the other person give his/her agent 2 percent of $600,000.

DEAR BENNY: In October of last year, I made an offer for a "short sale" house. The seller had accepted my offer, which is now under the lender's review. There are two mortgage lenders that are currently in negotiation. According to our real estate agents, the banks can't seem to agree on the amount that the second lender should get. It's been a long time since my offer was accepted. During this time, I estimate the house has lost about $40,000 in value. What are my options? I still like this house but don't really want to pay the extra money. --David

DEAR DAVID: Join the wonderful world of banking. I just don't understand how banks work. One would think they would be happy to get the house sold as quickly as possible, so that they would not have yet another bad loan on their books. Clearly, they could have allowed the short sale months ago, and then the two banks could have argued over how the sales proceeds would be distributed.

My suggestion: Read your contract. Do you have the right to back out of the deal? If you are uncertain, check this out with an attorney.

Tell the seller (or the real estate agent) that you no longer want to pay the sales price, and if they don't accept a lower price (pick your number) you will walk away from the deal. ...CONTINUED

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