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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Forfeitures Clause
In most cases when you purchase land, buyers will make a down payment and apply for a loan for the rest of the asking price.
However, in some situations, the buyer will set up a contract with the buyer where they can make a down payment and pay the remaining amount of the land’s asking price in installments to the buyer.
What happens if the buyer is unable to pay the installments to the seller? In this post, we will understand what is a forfeitures clause in real estate in detail.
What Are Forfeitures In General?
Forfeiture is the loss of any property without compensation as a result of a breach of contractual obligations or as a fine for unlawful conduct.
Forfeitures, under the terms of a contract, refers to the requirement by the defaulting party to give up ownership of an asset, or the cash flows of an asset, in compensation for the losses implied to the other party.
Where required by law, such as punishment for illegal conduct or prohibited activities, the removal process may be criminal or civil. The removal process usually involves a court case.
What Are Forfeitures In Real Estate?
When a buyer buys real estate and has an installment agreement to make payments on the property, he must pay those payments.
If he does not pay these installments, the seller in his rights can abort the contract.
Post that the seller regains possession of the property and also keeps the entire amount that the buyer has paid up to the date including the down payment. This process is known as forfeitures in real estate.
This can be extremely hard on the buyer as they can lose every amount they have invested in the property.
This type of clause is used by the seller to benefit if the buyer defaults on the installments.
The seller gets the best of the benefits if the seller defaults on the installments as they get to keep the land along with the amount that the buyer has invested.
Example Of Forfeiture Clause
A couple has land that they want to sell and were searching for potential buyers. They found a buyer that was interested in buying their land.
The only thing was that the buyer wanted to go through seller financing and did not want to go through a conventional financing method.
The couple agreed to the buyer’s request as they thought this was the best option at that time.
The land was set to sell at $125,000 with a $25,000 down payment to be paid to the seller by the buyer under the forfeiture clause. The rest $100,000 was set up to be paid by the buyer in installments to the couple.
The contract was signed and the buyer starts making the payments and continues to do so for two years. After two years the buyer stops making payments to the couple due to some hardship.
After the buyer misses a couple of payments the couple decides to terminate the contract.
As the contract had a forfeiture clause, the couple takes back the land and also keeps the deposit of $25,000 along with the payments that the buyer made for two years.
The buyer loses the ownership of the land and the entire amount that he invested in the property in these two years.
Conclusion
The seller needs to send a 15-day written notice of default to the buyer before the proceedings.
If the buyer does not respond to the notice the seller can then file a complaint of possession in the district court.
Forfeitures are usually faster and cheaper options compared to a foreclosure. As a buyer, make sure that you read your contract and ensure that you are aware that it contains the forfeiture clause so that you can be prepared for your future installments.
