In Indiana, a seller ordinarily must foreclose on a land contract buyer, who has defaulted under the land contract. Generally, the seller cannot evict the buyer, or seek forfeiture. The distinction being made here is between the remedies of foreclosure versus forfeiture. This distinction looms large in Indiana.
In 1973, the Indiana Supreme Court, in a case called Skendzel v. Marshall, held that land contracts are to be treated like notes and mortgages, subject to Indiana’s expensive, slow and cumbersome foreclosure process. The rule of law established by Skendzel v. Marshall was supposed to be limited to cases in which the buyer had acquired a “substantial interest” in the real estate. That means the buyer should have acquired meaningful equity in the property by paying down the purchase price. In reality, trial courts almost always apply Skendzel v. Marshall to deny a request for forfeiture.
Starting the Process
The first step in foreclosing on a land contract purchaser is for the seller to demand payment. If the land contract requires written notice from the seller to the buyer, the seller should send the notice using the delivery method required by the land contract. That usually means a letter sent by certified mail. Sellers should read the land contract carefully as to demand and notice provisions. In some cases, the seller must give the buyer an opportunity to cure any default. In those cases, a seller cannot file a foreclosure lawsuit until after providing the buyer with notice and opportunity to cure.
If the seller retains an attorney or other debt collector to begin the foreclosure process, the attorney/debt collector must abide by certain debt collection rules, primarily found in the Federal Fair Debt Collection Practices Act.
A seller should hire a title company to conduct a title search to determine whether any other person is asserting an interest in the property. Any such person should then be named as a defendant in the foreclosure lawsuit.
Once the lawsuit is filed, the buyer has 20 days after service of process to file an answer. That deadline is often extended by an additional 30 days. Most foreclosure lawsuits are resolved through a process called summary judgment, which is only available when there is no factual dispute and the court can decide the case based solely on the law. Many courts now require sellers to enter in mediation or other dispute resolution processes, as a means of reducing the volume of foreclosure cases in the courts. That can significantly delay the foreclosure process.
Judgment & the Sale
The court will eventually enter judgment in favor of the seller, prioritize the interests of any other parties claiming an interest in the property and order the property sold at a sheriff’s sale. At the sheriff’s sale, the seller will get a credit equal to its judgment amount, which should include principle, interest, court costs, sheriff’s sale costs and attorney’s fees. The sale is an auction, at which the highest bidder gains a deed. The strength of that deed depends on whether the foreclosure lawsuit was conducted properly, and that does not always occur.
For the seller, however, the case is essentially done. In most cases, the seller is the highest bidder and becomes the property owner through the foreclosure process. The seller can then sell the property to recover its losses. If someone other than the seller wins the auction, then the seller receives the proceeds from the sale. In some cases, the sheriff’s sale does not generate enough cash to pay for all of the seller’s damages. In those situations, the seller can petition the court for a deficiency judgment and try to collect additional damages from the buyer and any guarantors.
If the sheriff’s sale generates cash in excess of the amount owed to the seller and any other lien holders, then the balance of those proceeds is paid to the buyer. In theory, that payment represents the buyer’s equity in the property that was sold. In reality, there is rarely equity to be paid to the buyer.
Foreclosure is not a seller’s only remedy. For example, if a seller wanted to recover just unpaid installment payments or other damages, a seller could sue the buyer for damages only and not seek foreclosure. Or, a seller could obtain an injunction compelling a buyer to make repairs or refrain from violating neighborhood covenants, for example. Sellers almost never sue buyers to recover money only, but that is an option for the seller. A seller could even sue a buyer in small claims court to recover damages of less than $6,000, and might not need an attorney to do so.
Often, buyers will seek protection through the bankruptcy process in order to avoid losing the property through foreclosure. Bankruptcy can significantly impact the remedies available to a seller.
Long & Expensive Process
Foreclosure is a long, frustrating and expensive process for a seller. That is why the attorneys at GRIFFITH LAW GROUP LLC generally disfavor land contracts for sellers. In most cases, it is not in a seller’s best interests to sell a property on contract. Foreclosure simply costs too much time, attorney’s fees and lost opportunity costs for sellers in most cases.