Most real estate purchases involve loans. Virtually all real estate loans are secured by mortgages or deeds of trust. There is, however, another way to finance real property sales: the land sale contract. Land sale contracts are rare, but they are recognized under California law.
The idea of a land sale contract is simple. The buyer makes a down payment, and takes possession of the property. The seller retains title. The agreement provides that title will be conveyed to the buyer only when he or she pays the full purchase price. A land sale contract makes the buyer vulnerable. What happens if the seller sells the property to someone else, before the contract is completed? What happens if someone obtains a judgment against the seller? What happens if the seller takes out a huge loan, secured against the property? All of these possibilities could deprive the buyer of the value of the property.
There are two sets of answers to these concerns. First, the land sale contract should be recorded, so as to put all third parties on constructive notice of the buyer’s rights. If the land sale contract is recorded then anyone who acquires an interest in the property, after recordation of the contract, is junior in interest to the buyer. This prevents the land from being sold to someone else, or a loan being taken out against the property which sucks out all of its value.
Second, Civil Code Section 2985 sets out a number of regulations, designed to protect the buyer in a land sales contract. The owner is not permitted to transfer the property, unless he or she also assigns the benefits and obligations of the land sale contract to the new buyer. Civil Code Section 2985.1. The owner is not allowed to overly encumber the property. Civil Code Section 2985.2. If the property has a loan secured against it, the owner is required to apply the installment payments that he or she receives from the buyer, to pay the debt against the property. Civil Code Section 2985.3. The land sale contract must state the number of years it will take to complete the purchase. Civil Code Section 2985.5. Finally, the buyer is permitted to pre-pay the contract, and to obtain title – even if the contract prohibits this – if the property being purchased has a completed residence upon it and contains one to four residential units. Civil Code Section 2985.6.