On January 1, 2018, home buyers who choose to finance their purchase through Installment Contracts, also known as Contracts for Deed or, colloquially, “rent-to-own” contracts, will gain new protections under Illinois law through the Installment Sales Contract Act.
Installment contracts provide an alternate method of financing the purchase of property to the more traditional mortgage. Buyers who do not qualify for mortgages often use installment contracts under which they agree to pay sellers the agreed upon purchase price over time, and sellers take the place of lenders. Sellers are willing to enter into these contracts because they receive the interest payments, as opposed to a third-party lender. The contracts are structured so that the seller retains legal title to the property until the buyer pays all installments due, at which point legal title moves to the buyer. Prior to the final payment, however, the buyer owns nothing and does not build up equity as is possible with a mortgage, meaning a buyer could pay 119 of 120 installments, yet lose their rights to the property upon default. These and other burdens placed on the buyer without the benefits of ownership, such as property maintenance and code and regulation compliance, have led some in the real estate world to categorize them as predatory. (For more about the predatory use of installment contracts historically in Chicago, one can read Beryl Satter’s book, Family Properties: How the Struggle over Race and Real Estate Transformed Chicago and Urban America, about litigation handled by, among others, our own Tom Boodell.)
The Installment Sales Contract Act seeks to address these issues by imposing new requirements on sellers and providing buyers with some of the protections associated with mortgages under the Illinois Mortgage and Foreclosure Law. Under the new Act, sellers must record their installment contracts within ten days of the sale, meaning that any future purchaser will know of the existence of the installment contract. This also provides protections against scams in which a seller who does not actually own the property collects a buyer’s payments under an installment contract and defaults on the mortgage leaving the buyer with no rights to recover their payments during foreclosure. The Act also provides installment contract buyers with the right to have a third-party property inspection and receive notice of any building code violations affecting the property. Additionally, the Act provides for a 90-day cure period in the event of a default under the installment contract, thereby allowing the buyer the opportunity to make any missed payments without losing all rights under the contract. And perhaps most importantly, the Act provides that, even in the event of a default under the installment contract, the buyer can recover the value of the payments made to the seller. In this way, the Act provides the buyer with something similar to the equity that an owner builds under a mortgage.
The Installment Sales Contract Act will, at a minimum, impact how buyers and sellers under installment contracts operate and has the potential to make such contracts a more common method of selling property in Illinois. Boodell & Domanskis’s real estate attorneys have experience with installment contracts and can assist both buyers and sellers with the impact of the Act, including complying with its requirements. For more information contact Max Stein or Al Domanskis.
The text of the new Act can be found at- http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=3813&ChapterID=62
Ted Harrington, law clerk at B&D, was a contributor to this article.