Land Contracts: Shaky Ground or Solid as a Rock? Part III

by Andrea S. Alford, Deputy Executive Director

In a recent two-part series for the Arkansas REALTORS® Association’s House to House column in the Arkansas Democrat-Gazette, we examined the implications of entering into land contracts for both buyers and sellers. Copies of those articles can be found {{here}}. Brokers assisting clients in land contracts may find these articles helpful. In this article, however, we will discuss a possible ramification of land contracts for all licensees.

The more I researched the topic of land contracts for this series, the more I found myself asking the question: “Why, if these contracts are so complex and treacherous, would anyone ever agree to them?” In fact, I started to scrap the whole series and find something new to write about – something a little less complex, with fewer fire-engine-red flags flying at every turn. Sure, we know there may be an untold fairy tale for every horror story we hear, but our experience as regulators usually bears out a truth best quoted by Commission Vice-Chair Tony Moore: “For every mile of road, there are two miles of ditch.”

When I’m presented with a challenge and unsure of how to proceed, I often return to our mission statement: “The mission of the Arkansas Real Estate Commission is to protect the public interest…” Taking it one step further to our agency’s core values, the Commission commits “…to serve the citizens of the state of Arkansas by advancing a secure real estate marketplace.” While there’s certainly no escaping the fact that land contracts present multiple challenges to buyers and sellers alike, sometimes land contracts go off without a hitch for everyone involved. What’s more, sometimes land contracts are the most – or only – viable path to selling or owning that home or that farm or that piece of land. If consumers are willing to take on the risk associated with land contracts, they should be free to make that choice, and we should do what we can to ensure they are empowered and informed in the process.

The one million dollar question for real estate brokers and agents, though, is this: can land contracts pose any threats to brokers and agents? The answer is yes. Aside from the standard potential for misunderstandings and acts of negligence to occur as in typical real estate transactions, a new concern arises related to the actual land contract itself, and this concern affects all licensees – not just those who are representing clients in land contracts.

Most real estate licensees are aware that their ability to fill in the blanks of real estate contracts pre-approved by an Arkansas attorney amounts to a limited ability to practice law under very specific circumstances and is a result of the Arkansas Supreme Court’s decision in the case of Pope County Bar Association, Inc. vs. Suggs, 624 S.W. 2d 828 (1981). We refer to this authority as the “Pope County decision”, and Arkansas real estate agents rely heavily upon this decision to perform their duties in representing buyers and sellers.

The Pope County decision requires a “…present conveyance of a fee simple absolute,” which, as explained in Part I of our Land Contracts series, does not occur in most land contracts. The manner in which title transfers in land contracts raises the question as to whether or not a real estate broker can handle this type of transaction. However, because this is a common transaction in most parts of the state – particularly in more rural areas – it is unclear if the Court meant to prohibit brokers from handling land contracts. Due to this uncertainty, it would be advisable for brokers to involve an attorney when handling a land contract, or to at least have an attorney approve the broker’s methodology in handling a land contract. It is important that real estate licensees take this issue in particular very seriously. Should Arkansas real estate agents begin to venture beyond the limited authority granted by the Court in the Pope County decision, they risk having that authority removed entirely.

So let’s go back to the Commission’s mission statement and core values. Our mission is protecting the public interest, and we value advancing a secure real estate marketplace for the citizens of Arkansas. The Commission firmly believes that the Pope County decision supports both our mission and our values. Therefore, the Real Estate Commission very strongly encourages licensees to involve a qualified Arkansas real estate attorney to assist in transactions involving land contracts. Even without considering the limitations of the Pope County decision, land contracts have been the subject of enough civil litigation and Real Estate Commission complaints over the years to demonstrate that all involved in the transaction should exercise caution, lest they find themselves landing in the ditch.