Q         Dear Rick:

I have a problem and I hope that you have some sort of solution.  Ten years ago I was in pretty bad financial shape and my credit was ruined because of a divorce.  Because I could not qualify for a mortgage I ended up buying a house on land contract.  The land contract was for 10 years and at the end of the 10-year period there was a lump- sum payment.  I made all the payments on time, including the lump-sum payment.  I did receive a discharge of land contract and the deed.  The problem is that I just found out that there is another mortgage on the property.  I talked to the mortgage company and they basically said in so many words that unless I pay the mortgage, they will foreclose.  I can’t believe this is happening to me as I think I did everything right.  My question is what do you think I should do?  You should know that neither the seller nor I used an attorney; we used one of the online legal companies to complete the forms.  Help.

`                                                                       Dennis

A         Dear Dennis:

In reviewing your situation, the first issue is whether or not the mortgage company is right or wrong.  In other words, can they foreclose on your property?  The simple answer to that is yes.  The fact that you paid the land contract is relatively immaterial to the bank.  What is relevant to the bank is whether the mortgage was paid.  Since it was not, they have every right to foreclose on the property.  As far as they’re concerned, they had a proper lien on the property and whoever bought the property after their lien was placed on the property is subject to it.  Therefore, they are correct that they can foreclose on you.

Even though the bank is correct that they can foreclose on your property, you do have some recourse.  Most likely, the land contract between you and buyer requires him to deliver the property to you, free and clear of any liens.  As a result, since the property was not given to you free and clear, you can potentially bring a cause of action against him.  In other words, you can sue him for the amount of the unpaid mortgage.  Of course, that would require you to hire an attorney to represent you.

I cannot stress strongly enough how important it is when doing any real estate transaction to have an attorney represent you and only you.  I love the idea of trying to save money on legal fees, but you don’t want to be penny wise and pound foolish.  Even the simplest of real estate transactions can have some complexities and it is important that you dot the i’s and cross the t’s.  Particularly, when you’re dealing with a land contract which has its own complexities, it is important that you have a professional involved.

With regard to land contracts, many people think that they are the same as a mortgage, but they are not.  When you buy a home and obtain a mortgage to help finance the home, the deed is in your name and the mortgage company basically has a lien on the property.  When you use a land contract, the deed does not transfer until the land contract is paid off.

Land contracts are not very popular; however, they are extensively used when a buyer cannot obtain traditional financing such as a mortgage.  Basically, in a land contract situation, the seller is doing the financing of the purchase.  The question always is whether or not I recommend land contracts.  If I represented the seller, my answer is generally no.  My philosophy is if someone can’t obtain a mortgage traditionally, do you want to take that risk?  On the other hand, when I represent a buyer, a land contract can be a valuable tool.

One last note and that is I would not delay in retaining an attorney as soon as possible.

Good luck!