A land contract in Michigan is a sale financed by the seller: you move in and pay the seller in installments, and the seller keeps legal title until the contract is paid, then must give you a deed. Most private sellers can charge at most 11 percent interest a year, and if you fall behind, you can lose the home and what you have paid within months.
This guide explains how a Michigan land contract works for a buyer, what the law sets and what is left to the contract, what to check before you sign, and what happens if payments stop. We are real estate brokers, not attorneys, and a land contract is a document worth having a Michigan real estate attorney read before you sign.
How does a land contract work in Michigan?
There is no bank between you and the seller. You and the seller sign a contract that sets the price, down payment, interest rate, payment and final payoff date. Then:
- You get possession and equitable title, the right to obtain full ownership by finishing the contract.
- The seller keeps legal title. Your name doesn't go on a deed yet.
- You usually take on the costs of owning. Buyers generally handle repairs, property taxes and homeowner's insurance, as the contract states.
- When you have paid in full, the seller must give you a deed (MCL 565.361).
Michigan has no required state form. Terms not set by law are whatever you and the seller agree to in writing.
What the law sets, and what the contract sets
| Term | Who sets it |
|---|---|
| Interest rate | The contract, up to 11% for most private sellers (MCL 438.31c(6)) |
| Interest calculation | Law: on the unpaid balance only, not added in advance (MCL 438.31c(9)) |
| Seller's disclosure statement | Law: due before the seller signs the contract (MCL 565.954) |
| Right to forfeit on default | The contract must say so (MCL 600.5726) |
| Time to fix a default after notice | Law: at least 15 days, longer if the contract says (MCL 600.5728) |
| Price, down payment and payment | The contract |
| Payoff date and any balloon payment | The contract |
| Who pays taxes, insurance and repairs | The contract |
| Deed at payoff | Law requires one; the contract can name the type (MCL 565.361) |
What is the maximum interest rate on a land contract in Michigan?
For most private sellers, it is 11 percent a year. MCL 438.31c lets the parties agree to any rate only where the seller is a lender approved as a mortgagee under the National Housing Act, or regulated by the state or a federal agency, and authorized to make such loans. Other sellers are held to 11 percent, and that figure includes everything that counts as a finance charge under the federal Truth in Lending Act. So a fee can count toward the cap.
An example: what a balloon payment means
Here is how the numbers can work, with example figures that are not a quote or a typical deal. Say the price is $200,000, you put $20,000 down, and the contract charges 9 percent on the remaining $180,000. Payments are figured over 30 years, but the whole balance is due in 5 years.
| Example | |
|---|---|
| Monthly payment, principal and interest | $1,448.32 |
| Total paid over 5 years | $86,899 |
| Part of that going to interest | $79,483 |
| Balance due at the end of year 5 | $172,584 |
Two things stand out. First, you will need about $172,584 in one payment at year 5, and missing it is a default. Before you sign, ask how you would pay it. Second, the down payment and 5 years of principal come to about $27,416, or about 14 percent of the price, which matters if you ever fall behind (see below).
Payments here don't include taxes or insurance. To try other terms, use our land contract calculator.
What should you check before signing a land contract?
The title. The seller keeps the title for years, so find out what is on it. Have a title company or attorney search the records at the county Register of Deeds for mortgages, liens and unpaid taxes.
The seller's mortgage. If the seller still has a mortgage, your payments don't remove it. A due-on-sale clause lets a lender call the loan due if an interest in the property is transferred without its consent, and federal law lets lenders enforce those clauses (12 USC 1701j-3). Ask for the lender's written consent, or for proof the mortgage is paid, and find out how the seller will keep it current. If the seller stops paying, your home is at risk.
The condition of the home. You will likely be paying for repairs, so get an inspection. The seller must give you the Seller's Disclosure Statement before signing the contract (MCL 565.952, 565.954).
The default terms. Read the forfeiture and acceleration clauses. A contract can give you more time than the 15 days the law requires, and that is worth asking for.
The price. With no appraisal or lender, nobody checks the price for you. Compare it with recent sales of similar homes.
Records. Agree how payments are tracked, who sends you a statement, and how you will prove taxes and insurance are paid.
Does a land contract have to be recorded in Michigan?
No, but you should record it. A land contract isn't invalid for lack of recording (MCL 565.361). Without it, though, the public record shows the seller as owner with no sign of your interest. Under MCL 565.29, an unrecorded conveyance is void against a later good-faith buyer who pays for the property and records first.
Buyers commonly record the contract or a memorandum of it at the Register of Deeds in the county. A title company or attorney can prepare it so it meets recording requirements.
How does a land contract affect property taxes?
Your taxable value can uncap. A land contract is a transfer of ownership under MCL 211.27a. The taxable value uncaps the year after you sign, and it doesn't uncap again when the deed is recorded later. Our property tax uncapping guide explains what that does to the bill.
File the Property Transfer Affidavit. You must notify the local assessor within 45 days of the transfer, and that clock runs from the contract, not from the deed.
Claim the Principal Residence Exemption. The definition of owner includes a person buying under a land contract (MCL 211.7dd). If the home is your principal residence, file Form 2368 with your city or township.
Transfer tax comes later. Land contracts where title doesn't pass until the price is paid are exempt from state and county transfer tax (MCL 207.526(o), 207.505(m)). The Court of Appeals has said the exemption delays the date the tax is paid, so buyers can record the contract without paying it right away (Lake Forest Partners 2 v Department of Treasury, 2006). Have the contract say who pays when the deed is recorded. Our Michigan transfer tax guide has the rates.
What happens if you default on a land contract in Michigan?
The seller generally has two paths.
Forfeiture
This is the faster path, and it is available only if the contract provides for it (MCL 600.5726).
- Notice. The seller serves a written notice of forfeiture listing what is owed. You have 15 days, or longer if the contract says, to pay what is past due and fix other breaches (MCL 600.5728). Accelerated amounts don't count toward what you must pay here.
- Court. If you don't, the seller can file for possession in district court.
- Time after judgment. You have 90 days if you have paid less than 50 percent of the purchase price, and 6 months if you have paid 50 percent or more (MCL 600.5744). Paying the judgment amount with costs, and curing other breaches, within that time stops the seller from taking possession.
- End of your rights. Once the writ of restitution issues, any equitable right to redeem is gone (MCL 600.5744).
In the example above, the buyer would have paid about 14 percent after 5 years, so the shorter 90-day period would apply. Land contract payments often build little principal in the early years, so reaching 50 percent can take a long time.
Foreclosure
The seller can instead foreclose in circuit court (MCL 600.3101). The court can't order a sale until 3 months after the complaint is filed (MCL 600.3115), and you have 6 months after the sale to redeem by paying the amount bid, with interest (MCL 600.3140). Michigan Legal Help notes that a buyer may owe the shortfall if the sale brings less than the balance, and that a seller may seek damages under the contract after forfeiture. If you are facing either one, talk to an attorney or Michigan Legal Help quickly, because the deadlines are short.
Is a land contract a good idea for a buyer?
It depends on the terms and on the seller. It can open a path to a home outside of a bank loan, and it can be arranged directly with a seller. The risks are the ones above: you can lose what you have paid in a matter of months, the seller's mortgage or liens can affect you, a balloon payment may come due, and there is no lender checking the price or the title.
Whether you want a land contract or something else, it helps to know what is for sale. Set up new-listing alerts, and a Raven agent can pull recent sales so you can test a price. The contract itself is a job for an attorney.
