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Installment Purchase Of A Home

Ask the Real Estate Lawyer: Real Estate Law Q&A

REM # LAW 674

By Ilyce R. Glink and Samuel J. Tamkin

Summary: A reader purchased a new home on installment basis. Now there is a problem closing on the final purchase. Ilyce and Sam explain the basics of purchasing a home on installment and how to protect yourself against fraud.

Q: I purchased my home on an installment basis. But I have not been able to close on the final purchase of the home because the original loan obtained by the sellers on the home was obtained fraudulently.
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The loan documents were not signed by the actual owners. One of the owners refuses to do anything with the house since he never signed for the loan. The individual who forged the names has gone to court and has been convicted.

The house is still in the name of the owners who never signed the loan paperwork. One of the sellers still wants to sell me the house but first hast to clean up the title to the home.

Is there any way that the title can be cleared without filing suit against someone? Can foreclosure by the lender be a viable solution to this problem?

A: What a mess. Your question is quite complicated, but here’s the short version: you bought a home using an installment contract, you have made your monthly payments under the contract and you are now ready to take title to the home.

You have now found out that someone took out a loan on the property and the sellers knew nothing about it. Presumably if the sellers knew nothing they did not get any of the money in the loan that was obtained by fraud. Now you want to know how to get the title to the home without the bad loan.

Let’s dissect your question. An installment purchase of a home is a process by which you sign a contract to buy a home over time. The seller keeps the title to the home and when you fulfill the requirements under the contract, the seller is supposed to transfer the title to you.

To protect yourself with an installment contract for a home, you need to make sure the contract has protections for you as the buyer. One of these protections is to require the seller to obtain and pay for a title insurance policy. In states where the buyer pays for title insurance, you would need to buy such a policy.

The title insurance policy would give you some protection to the extent that the seller falls into hard times and has judgments or claims against him that could affect the title to the home. In addition the installment contract or a summary of the contract should be recorded against the title to the home.

While a title insurance policy takes care of some issues, the issue of a seller having an outstanding loan on the property is of great concern. If you had obtained a title insurance policy, you would have been on notice that the seller had a loan on the property. If the seller knew nothing of this loan, you could have decided not to proceed in the deal before you signed on the dotted line.

Finally, when there is a loan on a property, the contract buyer has an incentive to make sure that a portion of his payment that the seller otherwise would get is paid to the lender. The contract buyer doesn’t want the lender to foreclose on the property. If the lender forecloses on the property, the contract buyer could lose all the money he has put into the deal.

Back to your case, if the sellers refuse to sell the property to you and can’t clean up the title, you will have to either cancel the transaction or demand a return of all or a portion of the money paid to the sellers. If you paid a significant down payment to purchase the home, you should get that back. Your installment contract should have a provision that protects you in case the seller is unable to convey clean title to you. I hope you used a real estate attorney in this deal to protect your interests.

In looking over your letter, it seems that there is something strange about your situation. It is odd that the sellers refuse to sell to you.

If the seller never saw any of the money from the loan and if the loan was a fraud, the seller should be able to sue the lender to clear title on the property. If the lender should have obtained title insurance for the loan when they funded the bad loan, the title company would be responsible for the loss sustained by the lender. If the lender did not get title insurance, then the lender should be out of luck.

What is of concern is that your seller seems to be sitting back, taking your money, and won’t convey the title to you. If the loan isn’t contested, the property could be lost in foreclosure. If the property is lost, you are out of a home and will have to go after the sellers for your damages.

If your installment contract was not recorded, you did not obtain title insurance, and the installment contract does not contain provisions to protect you, you are going to have a terrible time trying to save yourself in this deal.

In any event, seek immediate help from an attorney that specializes in litigation with knowledge of real estate and installment contracts. You should move fast, particularly if no one is paying the mortgage and the lender is planning to foreclose.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com