Installment Sales Contracts

James L. Goldsmith, Esquire

Q. My seller's property has been on the market for a long time and the only buyer to come along is having trouble qualifying for a mortgage. The seller knows that, but is willing to risk selling the property to this buyer "over time" as long as he doesn't have to provide the buyer with a deed until the buyer has paid in full. Where do I find the right form? Has PAR published a standard installment sales contract?

A. No, PAR has no such form and don't even think about suggesting a form to the buyer or seller. Refer your client to an attorney.

Installment sales contracts, increase in popularity when a buyers market collides with tight money. We now have both and so there are sellers having to sell with fewer buyers in sight. To some sellers, a willing buyer with little money is starting to look good. Selling via an installment sales contract is a viable course.

Installment sales contracts present buyers and sellers with all sorts of potential pitfalls. Think about it: the best transactions occur when a buyer pays the entire purchase price, takes title and parties go their separate ways. Take the same transaction, but hold proceeds in escrow and allow the seller to make repairs after settlement, and your asking for worlds of trouble! Now consider the installment sales contract where the obligation owed by each party to the other lasts for years.

These are just a few of the problems I have seen:

  • After years of paying installments toward the purchase price, seller defaults on her mortgage, foreclosure occurs and the buyer is out of his home and money;
  • Buyer moves in, defaults on the payment, and before vacating the property removes the mantel, trim, molding, lighting fixtures . . .;
  • Buyer records the installment sales contract at the recorder of deeds office and the seller's lender takes note and calls its mortgage due in full because the seller has "sold" it in violation of a due-on-sale clause in the mortgage;
  • The buyer does not record the installment sales contract and the seller subsequently borrows all of equity remaining in the property but fails to retire the lien by the time buyer has paid in full.

As you can see, the issues that present in an installment sales contract differ vastly from the ordinary transaction. By all means, advise your clients that this method of transfer exists, get paid for putting the parties together, but require that documentation and counsel come from a lawyer.