Hidden Risks In Land Contracts

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Scott A. Storey
Foster Swift Agricultural Law Update
January 2012

Selling property by land contract is often a viable option where conventional financing is not available.  However, there can be risks associated with a land contract that are completely unrelated to the financial considerations. 

An example of these potential risks arose when a Foster Swift farm client was presented with an opportunity to sell several hundred acres of timbered land.  The property had been well-managed for decades by a well-qualified forester.  The buyer offered a generous price and represented that his intention was to establish an upscale development on large wooded lots with a park-like buffer.  The purchase was to be financed through a land contract. 

Shortly before the closing, however, the client observed a timber harvester on the wood lot, apparently marking trees for clear cutting.  Alarmed, the client requested Foster Swift to assist it in rescinding the purchase agreement.  Further investigation disclosed that this purchaser had obtained other large wooded parcels on land contracts, harvested all of the timber, and then defaulted on the land contracts, allowing the sellers to recover back the deforested property. 

The client was able to avoid this fate, but not until after defending a year of litigation brought by the purchaser in an unsuccessful effort to enforce the purchase agreement. And, although the client later obtained a significant judgment against the purchaser for fraud, it would have preferred to avoid the aggravation.

Next time this client sells property under a land contract, you can bet that its investigation of the purchaser will be thorough and that it will not be limited to only a determination of the purchaser's ability to honor the financial terms of the land contract.