LawPulse

Contract buyers don't enjoy the protection of mortgage foreclosure law. The new Installment Sales Contract Act makes them less vulnerable to predatory sellers.

Most home purchases, unless they are cash deals, involve a mortgage loan. Since the real estate market crashed in 2008, a lesser-used path towards home ownership has been on the rise - owner financing. Also known as an installment contract, owner financing allows a buyer to live in a home while paying the seller the purchase price over time.

However, the practice is ripe for abuse because the purchaser doesn't actually own the home until the balance is paid in full. That means the Illinois Mortgage Foreclosure Law - and its protections for homeowners - doesn't apply in the event of a default. A simple eviction action is all it takes to divest the would-be purchaser of what may be a significant financial investment. On August 25, 2017, Governor Rauner approved Public Act 100-0416, also known as the Installment Sales Contract Act, which is designed to provide protection for purchasers.

According to a March 2017 report by The Chicago Reader (http://bit.ly/2ulgc2X), installment sales contracts are seeing a resurgence in Cook County, particularly in poorer communities that were hit hard by the foreclosure crisis. According to the Reader, Illinois law doesn't require that these contracts be recorded or otherwise registered with the state, which makes it difficult to know just how many exist.

That ends on January 1, 2018, when the new Act takes effect. Section 20 requires sellers to record their contracts within 10 days of the sale. If the contract is not recorded, the buyer has the right to rescind it until it is recorded. If the contract is unrecorded and title to the property becomes clouded, then the buyer has the option of rescinding up to 90 days after discovering the title defect even if the contract has been subsequently recorded.

Disclosures, cure period required

Another issue raised by the Reader's investigation is that many contract buyers aren't savvy consumers. They don't know they should have a home inspected before purchasing it. The Act requires that each installment sales contract include a statement in large, bold font disclosing the buyer's right to have a third party inspect the property. Some buyers have discovered that the properties they are trying to purchase are rife with code violations - some have even been condemned.

Since the installment sales contract puts the responsibility for maintenance on the buyer, this can trap people. They must choose between making the repairs and incurring significant costs, jeopardizing the ability to pay, or breaching the agreement by not bringing the building to code.

The Act also addresses this issue, requiring a disclosure in large, bold font stating the building has been condemned. It also requires full disclosure of any building code violations that may be pending against the property. This should help potential buyers avoid a scenario where they invest heavily in a property only to lose it and have nothing to show for their investment.

The scenarios described in the Reader article are examples of predatory lending. Prior to the passage of the Act, it was a simple matter of evicting a buyer who had fallen behind on payments, allowing the seller to reap the benefit of any improvements the buyer had made. Now, the Act requires a 90-day cure period for a buyer's default under the contract. During that period, the buyer may make all payments, including any fees and charges, currently due to cure the default.

If the buyer cannot cure the default, any money the buyer spent repairing the property will be credited to the buyer and deducted from the remaining amount due under the contract. This may seem like cold comfort, but the Act also amends the Illinois Mortgage Foreclosure Law to require that any real estate installment contract where the unpaid amount is less than 80 percent of the original purchase price go through a judicial foreclosure in the event of a default. This provides powerful protections that an eviction proceeding does not afford to contract purchasers.

Carve-outs for downstate transactions

Joseph Fortunato, Jr., a partner at Kaufman Dolowich Voluck, says that installment contracts weren't always the "device of evildoers" but were once seen as "a means to break the economic logjam caused by the inflationary spiral" of the late 70s. At that time, the interest rate for new mortgages exceeded 16 percent. Fortunato says that sellers, who often had single-digit interest rates, were happy to enter into installment contracts because most buyers weren't willing or able to pay such a high interest rate. Additionally, the income generated from interest under the contract usually exceeded the return on other types of investments.

Fortunato says that, during the drafting of the Act, many downstate lawyers saw the issues raised in the Reader's report as largely a Cook County problem that didn't justify "sweeping legislation" statewide. Also, installment contracts are often used to sell the family farm.

Two carve-outs in the act were made to lessen its impact outside Cook. First, a seller is defined as an individual or entity that enters into an installment contract three times in a 12-month period. This protects individual sellers while also protecting potential buyers from companies seeking to profit off of low-income neighborhoods. Additionally, the definition of residential real estate excludes tracts of land that are more than four acres or that are zoned for agricultural purposes.

As with any contract, buyers should consult an attorney before signing. Fortunato says that consumers must "watch out for themselves" even with the Act's new protections. While individual homeowners often don't seek legal advice, Fortunato argues that "representation by a lawyer in a residential real estate transaction is one of the few remaining bargains in our lifetime." He says there are many instances where the fee charged to a buyer, if broken down to an hourly rate, is less than $40 per hour.