Forfeiture vs. Foreclosure of Michigan Land Contracts: 5 Things to Consider for Seller Financing


Forfeiture or Foreclosure

When a buyer defaults on a land contract, the seller can generally pursue one of two legal remedies: forfeiture or foreclosure. Both remedies have advantages and disadvantages. Forfeiture is faster, cheaper and easier, but does not allow you to accelerate the debt or obtain a deficiency judgment. Forfeitures are summary proceedings filed in District Court governed by MCL 600.5701, et. seq. and MCR 4.202. It takes longer and costs more, but may be appropriate when the buyer is chronically delinquent or when the seller wants to pursue a deficiency judgment. Foreclosures are governed by MCL 600.3101 et. seq. and MCR 3.410 and are filed in Circuit Court.

Below are five things for vendors to consider when deciding whether to pursue forfeiture or foreclosure as a remedy for default under a land contract.

Does the Value of the Property Exceed the Remaining Debt?

If the value of the property exceeds the remaining debt, forfeiture may be a better remedy, since a deficiency is not needed, and the forfeiture process is quicker. In forfeiture, if the purchaser does not pay the past due payments under the land contract after receiving a 15-day-forfeiture notice, the seller may file suit for a judgment for the monthly payments, which remain unpaid. If the buyer fails to redeem, the seller can keep the property in satisfaction of the debt and realize the value of the equity.

Is the Value of the Property Less Than the Remaining Debt?

If the value of the property is less than the remaining debt, foreclosure may be the better remedy, since in foreclosure the seller may accelerate the debt and obtain a deficiency. After a 45-day-notice period on a default, the vendor may accelerate the debt and pursue judgment on the entire balance due. After a foreclosure sale of the property, if the sale price is not sufficient to pay the remaining debt, the seller may obtain a deficiency judgment for the difference between the sale price and the debt. This remedy is only available if the land contract: (i) permits acceleration and (ii) does not contain a non-recourse provision.

Is the Vendee Chronically in Default?

If the vendee is chronically in default and is bringing the balance current, and the seller wants to recover the property, foreclosure may be better if the land contract contains an acceleration clause. In forfeiture, the seller cannot accelerate the debt. Therefore, the vendee can cure by paying the past-due monthly payments. If the seller wants to terminate the land contract and evict a vendee in chronic default in a foreclosure, the seller can accelerate the debt, making it harder for the tenant to cure.

Is the Property Contaminated?

If the vendor does not want the property back because, for example, it is contaminated, the vendor does not have to pursue forfeiture or foreclosure, but rather can pursue an action on the debt only.

Is the Litigation Complicated by Title Issues or Counterclaims?

Claims for money damages in excess of district court jurisdiction of $25,000 will get removed to Circuit Court. Also, the District Court does not have jurisdiction to hear quiet title actions. Therefore, if there are disputes as to title, these will need to be heard in Circuit Court. For these reasons, a foreclosure in Circuit Court may make sense, since the seller will not be able to take advantage of the speed of the summary proceeding in any event.

In short, if you are a vendor on a land contract and your vendee is in default, think carefully based on the language of the land contract, the value of the property, and your particular situation as to whether forfeiture or foreclosure is the right remedy for you. The above are just some of the things to consider when pursuing remedies against a land contract vendee in default.

About the Author

Since 1990, attorney David Soble has represented lenders, loan servicers, consumers and business owners in real estate, finance and business matters. He has been involved in thousands of real estate transactions and has successfully negotiated and saved millions for his business and consumer clients alike.

Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own, qualified attorney.

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