Understanding Real Estate Agreements for Deed in Illinois

What Is An Illinois Agreement for Deed?

An agreement for deed, also known as a land contract, is a real estate instrument that allows a seller to sell a property, while the buyer makes payments toward the purchase price and then obtains title to the property at some future time, or upon the performance of some condition. An agreement for deed is really a hybrid of a rental agreement and a contract to purchase. The seller takes back a promissory note secured by a mortgage and the buyer pays rent and/or a payment toward the purchase price until it is paid off. An agreement for deed is generally used to facilitate a sale where the buyer cannot qualify for a bank mortgage , but otherwise qualifies as a purchaser. The agreement will state when the buyer will be given title to the property once the project is completed. An agreement for deed often is not the preferred choice for purchasing real estate, because the buyer never gets title to the property. Alternatively, a lease option may be used. The purchaser (through the "option") is given the right to purchase the property at some point in the future if they pay certain sums of money in rent, which goes toward the purchase price. Are you looking into selling or purchasing property with an agreement for deed or land contract? Consider hiring an attorney to assist you with this process.

The Rules and Laws for Agreements for Deed in Illinois

Illinois law does not have a statute that specifically regulates an agreement for deed as part of its home rule authority. The Illinois Home Equity Loan Act, 815 ILCS 140 (the "Act") does have provisions that are applicable to a transaction that involves the advancement of funds where the result of such advancement is the execution and delivery of a mortgage on the purchaser’s home. The purpose of such a statute is to prevent the making of home equity loans based on false credit information and to ensure that the terms of the home equity loan are made clear to the borrower prior to consummation of the loan.
The Illinois Home Equity Loan Act applies to any entity that is engaged in the business of taking a security interest in the borrower’s interest in a dwelling (such as a third-party investor or private lender) and provides:
"(b) Any person who is not otherwise exempt by law shall not engage in the business in the State of taking a security interest in the borrower’s interest in a dwelling secured by a mortgage [or] in a motor vehicle without first obtaining a license under this Act, paying the fees prescribed by this Act, maintaining the bond required under this Act, and filing with the Secretary of Financial and Professional Regulation (the "Department") other information as may be required by the Department."
(d) No person may use the words "home equity loan" or "equity loan" in a name, title, advertisement, or marketing material to refer to a transaction unless the transaction meets the requirements of this Act, including but not limited to the following: (1) the borrower is not entitled to receive a check or cash from the lender; (2) the loan is not a cash-out refinancing if the proceeds of the prior mortgage loan are not used to reduce the amount of the new loan; (3) the property is not sold by the borrower; (4) the loan is not described as a quick cash transaction or with any similar words; and (5) the borrower is not referred to as the "seller," "seller/landlord," or any similar words.
In practice, the Department views a private seller leasing his/her home under an agreement for deed as a situation requiring a real estate broker’s license, which, in the Department’s opinion, is required pursuant to Section 10-5 (200 ILCS 840) of the Real Estate License Act and pursuant to Section 225 ILCS 454/5-5, which states:
"Subject to the exceptions set forth in this Act, no person shall act or assume to act as a real estate agent, or deal in real estate in this State in behalf of another for a fee or valuable consideration without being licensed as a real estate broker or salesperson under provisions of this Act."
The Department interprets this statute so that even merely leasing residential property requires a license. In its opinion, a sale-leaseback transaction that resembles a residential lease, combined with an option or right of first refusal to buy back the property, sounds in real estate.
It is important to note that agreements for deed are not as ubiquitous in Illinois as in other states, such as Florida, where there are thousands of them. Illinois tend to prefer simply selling their homes, often providing a seller-financing option in a conventional sale. Since the housing market crash, many owners are unaware or forget the amount still owed on their underlying mortgage. Therefore, it is difficult to find a motivated seller who would be willing to sell via an agreement for deed. Rather, most sellers are the equivalent of a traditional homeowner who will finance their property. In fact, a recent search on the MLS only turned up two listings in the past 3 months with an agreement for deed.

The Pros and Cons of an Illinois Agreement for Deed

There are benefits and risks to both parties entering into an agreement for deed. This is true for both the buyer and seller (for sellers it is sometimes referred to as a "land contact"). Since this is a discussion about agreements used in Illinois, let’s take the state’s laws into account. For example, Illinois law holds that a buyer who misses 3 consecutive payments on a land contract can lose every single penny he or she has put into the home. This is called "forfeiture". A lawsuit must be filed to get title to the home back in the name of the seller.
This means sellers need to decide if the property can be repossessed or is it better if the sale is a complete loss. Although the forfeiture process is faster than the foreclosure process, there is a risk that the buyer will not be able to make the required payments, and the homeowner will have to go through the forfeiture consequences. Conventional foreclosures can take anywhere from 6 months to a year or more. This is a long time for the homeowner to live in the home without paying the mortgage or to get a second income from renting the home. As well, lenders will sometimes work with the homeowner to avoid the foreclosure process, which can lead to modification options for the homeowner and a longer stay in the home. With forfeiture, the process takes only 30 days to evict a buyer once unpaid for three months.
Buyers can also see risks when committing to an agreement for deed. Buyers may find themselves having to pay more than they can afford for a home. If the homeowner is not struggling financially – such as if the mortgage amount is about to drop from private mortgage insurance (PMI) dropping off the monthly payment, the buyer is willing to make payments higher than the mortgage payment or $300 over the mortgage payment and property taxes, the buyer could overpay for the home. This can be fine, since the buyer has chosen to forfeit rights of a conventional mortgage in favor of flexibility. However, the buyer must be able to afford the home or risks forfeiting the contract and losing all the money put into the home.

How to Set Up an Illinois Agreement for Deed

While the most common method to acquire or cash out of real estate is by purchase and sale agreement, there are several other ways of doing so including deeds, contracts, and land trusts. One of these unconventional methods is the "agreement for deed" which is simply a contract specifying that payments will be made to a seller for an extended period of time. In return for payments, the seller gives the buyer the ability to occupy the property during the payment period. Once the purchase price is satisfied in full, any deed given to the buyer will be made to satisfy the agreement for deed.
There is no single written statute or court rule specific to agreement for deed so there is no standard form for it. Illinois courts have held that they "will not declare a contract void for lack of form" if the contract does not violate some statutory prohibition. See The Peoples Trust and Savings Bank v. Heller Municipal Court, 3 Ill.App.2d 327, 119 N.E.2d 117 (1st Dist. 1954). As such, any written agreement that is not contrary to law can be used for an agreement for deed. However, if the agreement contains a provision that the buyer will occupy the property, the contract will be treated, in part, like a lease, and certain legal requirements of a lease must be satisfied.
The following is an example of the steps involved in a typical real estate transaction using an agreement for deed:

• A buyer and seller negotiate the terms of the agreement, including price and financing terms.
• A written agreement for deed document is drafted to reflect the terms of the agreement.
• The seller conveys title to the property to the buyer and the buyer begins making payments to the seller.
• If title is conveyed prior to financing, a mortgage or deed of trust is recorded outlining the financing terms and establishing a remedy for default.
• Once the buyer makes all payments due under the agreement, and/or the term expires, the seller conveys the property back to the buyer.
• The buyer owes no further payment to the seller and is free and clear of any obligation to the seller.

A written agreement should contain the following terms: The seller should have his or her own attorney draft the written document. This is also an opportunity to negotiate the terms of the deed Since the agreement is a form of contract, the parties can list any arrangement to suit their needs.
Negotiation tips: Whether the buyer or the seller, it is important to keep in mind that the terms of a written agreement can be made to suit the needs of both parties. For example, a seller with a bad credit history may agree to purchase the home for an otherwise credit-worthy buyer. Additionally, the seller could allow the buyer to occupy the premises until he or she qualifies for financing or can satisfy the entire purchase price.
It is likely that the parties to an agreement for deed will have a close relationship and will need to trust one another, and in light of the unique character of agreement for deed in Illinois, it is recommended that parties consult an attorney before entering into an agreement for deed.

Common Problems With an Illinois Agreement for Deed

First and foremost, you need to ensure that you are legally able to sell the property to another party via agreement for deed. To do so, all of the following must be true:
Issues which arise in agreement for deed transactions can often be overcome, but only if you know what they are. Legal title to the property may be clouded by the deed to the buyer, who now has a right to the property . If the buyer fails to make the payment, you may be forced to foreclose on a property under a contract in order to obtain possession of the property. A foreclosure action is similar to an eviction action against a tenant, except that the notice requirements are longer and you should consult with an attorney to ensure that the action is properly commenced. However, depending on the language in the contract, you should be able to recover the property fairly simply upon a default in the payments.

Termination and Enforcement of an Illinois Agreement for Deed

An agreement for deed is a contract, and the general contractual remedies apply. The remedy for a default by the buyer is the institution of a foreclosure proceeding. The seller can effectuate a settlement without the need for foreclosure. The defaulting purchaser can obtain specific performance and compel the seller to accept a deed at any time any time before the foreclosure sale. Under Illinois law, a deed delivered to a grantee with the intent that it constitutes security for a debt and is accepted by the grantee as such is enforceable as an agreement for deed. The remedy of specific performance is commonly employed by the purchaser by bringing an action in equity to compel the seller to execute a deed. The agreement for deed is an executory contract for the sale of real estate, and all defenses available to an action for the specific performance of a contract are also applicable to actions to compel the execution of an agreement for deed.

Expert Tips for Buyers and Sellers

For both sellers and buyers, the agreement for deed option should be carefully considered. For sellers, the option has its advantages. In exchange for agreeing to provide financing to a buyer, a seller may be able to sell quickly, receive regular monthly payments, and retain the title to the property until it is fully paid for. But there are some drawbacks, too. The seller bears the risks of default by the buyer and, in Illinois, forced sale of the property if the payments are not made. Therefore, these are among the issues that an attorney specializing in real estate law should handle . While many real estate agents also have experience in this area, a knowledgeable attorney also can analyze and prepare the required documents and make sure that all legal requirements are met. This includes drafting the agreement for deed with clauses that clearly state the rights and obligations of both parties. With all of the legal and planning requirements involved, it is vital to consult an attorney early in the process of buying or selling real estate with an agreement for deed.