The Importance of a Memorandum of Land Contract

Memorandum of Land Contract

I prepared a land contract for the seller of an investment home for her tenant. As part of the process, I drafted a Memorandum of Land Contract (“Memorandum”) for the parties. My seller had sold several properties on a land contract but had never seen a Memorandum before. She questioned its need and importance. I explained to her the following:

What a Memorandum of Land Contract Is

A Memorandum of Land Contract is a legal document that verifies the relationship between a property owner and purchaser under a land contract. It must be filed in the county property records where the property is located. It specifies the names of the seller and buyer, the legal address of the property, and the date of the agreement. Additional terms may be added at the discretion of either party. One of the reasons to use a Memorandum is to keep details of a transaction private.

What a Memorandum of Land Contract Isn’t

A Memorandum can elaborate on the terms of the purchase, such as the monthly payment, but that isn’t necessary. The purpose of the Memorandum is to serve as a notice to the “world” that a subject property is under a seller-financed purchase agreement. There is no law that requires the Memorandum to be valid; however, it is recommended for both parties that one be drafted and recorded.

Why a Memorandum Is Important to the Purchaser

Without a Memorandum filed in the county property records, third parties would be unaware that the buyer’s intended property is already under a purchase agreement. An unscrupulous seller could impair the ability to sell it free of any encumbrances by, for instance, taking a mortgage out on the property. Even worse, the seller could sell the property to another buyer. In most states, this ‘second buyer’s interest’ is protected against the initial purchaser who failed to file their land contract interest. The only time a lender or prospective purchaser could know that a property had already been purchased or pledged would be when a title search revealed the recorded Memorandum.

There are other precautions and provisions to use when drafting a land contract that would prevent a seller from encumbering a property without notifying the buyer, but none is more effective than the recording of the Memorandum. I have counseled many purchasers buying on a land contract, who have come to me only after they had learned their seller had sold the property out from under them. A filed Memorandum would have stopped this seller misconduct.

Why a Memorandum is Important to the Seller

The seller should record the Memorandum if they ever want their buyer to pay them off by obtaining financing elsewhere. Land contracts serve as a good investment that generates income, especially in a low-interest environment. But sellers finance their buyer’s purchase for various reasons, such as if the home would not pass a bank inspection, or a purchaser doesn’t qualify for a bank loan. If the economy is soft, banks may not lend and the need for seller financing using land contracts increases.

Most lending institutions require that the land contract be recorded before they will lend. They are usually looking for at least 12 months of “seasoning” (a verifiable payment history for a specified length of time). A lender isn’t likely to lend otherwise. Recorded Memorandums serve to legitimize the existence of a transaction with the terms of the underlying contract: start date, parties, property address and amount of the sale.

Conclusion

Comprehensive documents for a property sale under a land contract include a Memorandum of Land Contract. Both sellers and buyers should insist that their real estate attorney draft and then record one for their legal and financial protection.

About David: As a real estate attorney and “former bank insider” author David Soble not only ‘talks the talk, but walks the walk’. He has over 25 years of practical and legal real estate experience gained from his ownership interests in hundreds of mortgages, notes, and income-producing properties. David has successfully represented numerous banks, lenders, investors, and consumers on both sides of the negotiation table in thousands of transactions.

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