Attorney Thomas B. Burton answers the following question: "What Happens if Seller of House Dies with Land Contract?"
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Hello, I'm Attorney Thomas Burton. I'm an estate planning, business and asset protection attorney here in Wisconsin and welcome back to our Question and Answer Series.
Today's question has to do with real estate and the writer asked the following - "How does a land contract work? The seller has a mortgage on the house, what will happen if the seller dies? My father-in-law would like to sell my husband and I, his house, on a land contract. My father-in-law still has a mortgage on the house currently but he was diagnosed with cancer and put on hospice. Can we use a land contract to obtain the house?"
So good question, there's a few things to be aware of and I want to walk you through them in this video today.
First, you should examine the mortgage documents carefully that your father-in-law has in his mortgage on the property. Usually the bank will have a lien on the house as a secured interest on the property, superior to all other lien holders. What this means is if your father-in-law died, his heirs - the people he named in his will or if he has no will then his next closest living relatives as determined by the statutes the laws of intestacy, would receive his house through his probate estate. So after he died, the estate would take ownership of the house but it's subject to the mortgage meaning that state would own the house but would be required to pay off the mortgage on the house, if the house is sold.
So usually in this situation, a state would seek to sell the house within one year or so, through the probate process. If your father has equity in the home and I think he does, based on your question but I am not sure, it's possible he could begin selling you the home on a land contract but it would still be subject to that mortgage on the property because they have the superior interest, the lien on the property. So if you buy it subject to the mortgage, you want to be clear about what you're buying which would only be his equity interest and you would still have that mortgage to pay, if he dies for you to get clean title, they would want you to refinance. You know because you can't just assume his mortgage in most cases, you would need to get your own mortgage. So if you buy a property, again you'd have to pay off that mortgage, it would be subject to the mortgage and the other thing to be aware of with land contracts is they are, they contain certain risks that a traditional mortgage doesn't for the buyer because if you fail to make a payment, the seller can essentially, they don't have to go through a for closure process depending how the land contracts written, they can quickly reclaim their interest in the property and you are left without anything. So if you do a land contract, examine it carefully and know what you're signing and I would sit down with a qualified real estate, estate planning attorney in your area, to go through the best options in this situation because if your father-in-law intends to leave this to you at death, it might be better to just do that through his will or trust.
The other thing we didn't even get into today is with Medicaid planning. I'd see you mentioned hospice but if he should need long-term Medicaid assistance, the land contract is going to cause problems for you likely if you enter into one at this late date and then try to qualify for Medicaid. So I would talk with a qualified estate planning elder law real estate attorney before you proceed with any of this planning because I'm not sure exactly what you're trying to do here. I can see your question about the land contract but I'm not sure what your ultimate goal is and if you sit down with an attorney and lay it out, they can give you the best options to achieve that goal in this situation but in general, be aware of the risks of land contracts, especially when you're the buyer and always be aware that if the bank has the superior mortgage lien on a property, they are always going to need to be paid off, first before you would have clean title to any piece of real estate.
So great question and thank you for asking.
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