Installment Sales Contract: Key Uses and Legal Insights

Key Takeaways

• An installment sales contract allows buyers to make payments over time, often used in real estate and vehicle purchases.
• These contracts often include forfeiture clauses, allowing sellers to reclaim property quickly if the buyer defaults.
• Common uses span from land and vehicle sales to technology services and seasonal agricultural goods.
• Compared to traditional mortgages, they offer fewer protections for buyers, making legal clarity crucial.
• It's essential to understand the legal risks, drafting elements, and state-specific regulations before entering such agreements.
• Consulting a qualified attorney can help navigate risks and ensure enforceable contract terms.

Installment contracts are agreements in which payments, performance of services, or the delivery of goods are made in a series instead of all at once. Payments, performances, or deliveries are typically made on specified dates, as outlined in the contract. These types of contracts are common in home and vehicle sales.

Common Examples of Installment Contracts

Installments contracts are commonly used in the following: 

• Vehicle sales
• Sale of land plots
• Technology or computer services, which need regular updating
• Agricultural goods or produce sales, which are subject to seasonal cycles
• Retail installment contracts, where wholesalers sell “in season” or “in-style” clothes to a seller

There are other circumstances that may call for the use of installment contracts. It's important to make the contract language explicitly clear, with specific details outlining how deliveries will work and how payments will be made.

Key Industries Using Installment Sales Contracts

Installment sales contracts are versatile and used across many industries. Beyond the typical use in real estate and vehicle purchases, the following sectors commonly use them:

• Construction: Builders may deliver materials or services in stages, receiving payment as each milestone is completed.
• Consumer Goods & Appliances: Retailers may offer buyers the option to pay in monthly installments for high-ticket items such as electronics or furniture.
• Educational Institutions: Some private schools or training programs use installment plans to spread tuition payments over semesters or academic periods.
• Healthcare Services: Certain elective procedures or dental treatments allow patients to pay through installment contracts over time.

These contracts are also popular in small business transactions, where sellers offer financing directly to buyers who may not qualify for traditional loans. For any of these sectors, clearly defining payment terms and consequences of default is critical to contract enforceability.

About Installment Contracts

An installment contract may also be known as one of the following when entered into between a real estate buyer and seller: 

• Articles of agreement for warranty deed
• Land contract
• Contract for deed  

When the contract is executed, the buyer immediately assumes possession, but the seller keeps the title to the property until the buyer pays the full price.  When the buyer makes the final payment, the seller then delivers the deed.

These contracts are very beneficial in real estate transactions, and they're an alternative to traditional mortgage financing. Consumers benefit if they don't have enough money to make a one-time, lump-sum payment. Sellers benefit when their goods or services can only be sold or distributed based on seasonal or cyclical schedules.

When used in real estate transactions, the installment contract acts as a security device, although it lacks many of the buyer protections and formalities commonly found in mortgage laws.

A forfeiture clause is common in many installment contracts. This clause protects the seller if the buyer defaults on the contract. In case of default, a seller can terminate the contract and regain the property. It also allows the seller to keep all payments made by the buyer. 

In comparison to mortgage foreclosure, sellers are able to recover their property more quickly under this clause since they don't have to do any of the following: 

• File a court case
• Observe notice and redemption rights
• Sell the property 

To make these rights clear, the right of forfeiture has to be clearly provided for in the contract. Otherwise, the court will not enforce forfeiture.

When drafting the contract, sellers should make sure to include a “time-is-of-essence clause." The seller shouldn't accept late payments in order to prevent a waiver of the clause.

Under an installment contract, buyers have less protection than that offered with a traditional mortgage. This is due to forfeiture provisions, which can be harsh on buyers who commit even a slight breach of contract. Because inequitable results are very possible due to these clauses, courts tend to look negatively upon them. 

Legal Considerations and Risks

An installment sales contract carries specific legal considerations for both parties:

• Title and Possession: Buyers typically take possession upon contract execution, but legal title remains with the seller until full payment is made.
• Default Remedies: A well-drafted forfeiture clause can allow sellers to regain property without court proceedings, but such clauses must be clear and enforceable under state law.
• Risk of Buyer Default: Since the buyer does not hold title, their investment may be lost entirely upon default, including any equity built over time.
• Lack of Equity Protection: Unlike a mortgage, an installment sales contract may not allow a buyer to recover payments if the contract is forfeited.

Courts may scrutinize forfeiture clauses and could convert the seller’s remedy into a foreclosure-like process if the terms appear inequitable. This is especially true when:

• The buyer has paid a significant portion of the purchase price
• The contract spans many years
• The property has appreciated in value

Buyers and sellers should consult legal counsel to ensure that terms such as interest rates, late payment penalties, and acceleration clauses comply with consumer protection laws.

Pros of Installment Contracts

Having more flexibility and fewer formalities are two advantages both sellers and buyers benefit from. 

For sellers, one benefit comes in the form of tax advantage from receiving payments over an extended period of time. Sellers also aren't bound by mortgage foreclosure laws if buyers default. Sellers may be more willing to sell to buyers who don't meet a traditional lender's qualifications since they know that in the event of a buyer default, they can recover their property quickly and at a lower cost than the process of foreclosure.

Buyers like installment contracts because they usually have a smaller down payment and lower closing costs.

As with any other type of contract, it's important to be very specific about the terms and conditions in an installment contract. While these contracts have advantages for sellers and buyers, they may have some drawbacks, too. You'll have to carefully consider the language in any forfeiture clause, as well as its enforceability. 

It's worth enlisting the services of a professional skilled in contract law, especially one who's familiar with the industry you wish to draft a contract for. You'll also have to adhere to any state guidelines, as these may differ depending on your location. 

Drawbacks and Limitations

While installment contracts offer flexibility, they also present risks and challenges:

• Limited Buyer Protections: Buyers may have little recourse if they default, losing possession and all prior payments.
• Seller Enforcement Complexity: Enforcing forfeiture may not be as straightforward as expected, especially in buyer-friendly states.
• Interest Rate Risks: Some installment contracts may include higher-than-average interest rates, especially for buyers with low credit.
• Title Complications: Sellers must ensure clear title transfer at the end of the term, which can be problematic if encumbrances exist.
• Tax and Regulatory Compliance: Sellers may face tax liabilities on installment income and must follow specific disclosures under laws like the Dodd-Frank Act if seller-financing is offered frequently.

These limitations make it vital for parties to understand state statutes and contract enforceability rules, especially in real estate sales.

Drafting a Strong Installment Sales Contract

For a valid and enforceable installment sales contract, certain elements should be included:

1. Purchase Price and Interest Rate: Clearly specify the total price and any interest applied to installment payments.
2. Payment Schedule: Include due dates, frequency (monthly, quarterly), and payment method.
3. Possession and Title Clause: Detail when the buyer takes possession and when the title transfers.
4. Default and Forfeiture Terms: State the consequences of missed payments, including grace periods and seller remedies.
5. Maintenance Responsibilities: Outline which party is responsible for taxes, insurance, and property upkeep.
6. Dispute Resolution: Include arbitration or mediation clauses if desired.

Each contract should also comply with state-specific laws governing land sales, installment agreements, or seller financing.

Frequently Asked Questions

1. What is the difference between an installment sales contract and a traditional loan?
   An installment sales contract involves the seller financing the purchase directly, retaining title until the full price is paid. A traditional loan involves a third-party lender, with the buyer typically receiving title upfront.
2. Can an installment sales contract be used for anything other than real estate?
   Yes, these contracts are also common in vehicle sales, technology services, agricultural products, and high-value retail items.
3. What happens if a buyer misses a payment?
   Depending on the contract, the seller may enforce a forfeiture clause, reclaiming the property and retaining prior payments. Some contracts include grace periods or late fees.
4. Is a down payment required in an installment sales contract?
   Most contracts include a down payment, but the amount varies. The rest is paid in scheduled installments over time.
5. Do installment contracts need to be recorded with a county or state agency?
   In real estate transactions, some states require the contract to be recorded to protect the buyer’s equitable interest. Requirements vary by jurisdiction.

If you need help with installment contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.