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Why Some Colorado Lawyers Don’t Like Installment Land Contracts

Some law firms, namely Frascona in Boulder, do not recommend installment land contracts.  The main reason is that there is uncertainty in Colorado as to seller’s path to getting the property back when the buyer defaults.  Unlike other states, like Illinois and Texas, there is no statutory process for foreclosure or eviction (called an “ejectment” in some states, which is harder than an eviction, but easier than a foreclosure).

A standard land contract states that on the buyer’s default, the contract is terminated and the buyer becomes a “holdover” tenant (similar to when a borrower remains in the property after a foreclosure).  The seller then files an eviction proceeding (F.E.D.) in County Court to gain possession of the property.  In most cases, the eviction is successful, since the buyer (who can’t afford to make the payments, thus can’t afford a lawyer) does not show up.  If the buyer does show up with a good lawyer, he will argue that he has an “equitable interest” in the property, and that the seller must foreclose the property.  Since Colorado County Court lacks jurisdiction to decide property ownership disputes, the case is transferred to District Court.  This causes a delay in the proceedings, which hurts the seller who may be making payments on his underlying loan and is not collecting anything from the buyer.

In District Court, the Judge will then decide whether the buyer has equity in the property, entitling him to the same rights as a regular property owner, to wit, foreclosure.  A foreclosure of this type is not the typical Public Trustee foreclosure, but rather a JUDICIAL (court) foreclosure, which can take many months and cost thousands of dollars in attorney fees.  In reality, the buyer almost always loses this argument because the Court usually finds the buyer has no equity.  Unless the buyer has been in the property a while, made improvements and/or put a lot down on the purchase, the Judge is sympathetic to the buyer’s equitable interest argument, thus it is rare that the seller will have to foreclose.

Frascona argues instead to always sell by an all-inclusive trust deed or “AITD” in Colorado.  They reason that there will be certainty if the buyer defaults, which means a public trustee foreclosure vs. a judicial foreclosure.  I disagree, particularly if I am representing the seller, which I often do.  Why set up an arrangement by which the seller has to foreclose vs. a situation where the seller can evict and risk a small chance of having to foreclose?

In most cases, the matter is settled out of court, with the seller paying the buyer some “cash for keys”.  This will almost always be faster, cheaper, and easier than going to court. If you are a seller on a land contract in Colorado and you fear the buyer may have substantial equity, it is a smart move to avoid court and give the buyer some cash in exchange for the property back.

If you go this route, make CERTAIN you have a qualified attorney draft the settlement agreement!

If you need help in this realm, call the Law Firm of Bronchick & Associates, PC at 303-398-7032.

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