Several readers have posed questions to me recently about house fires and land contracts, and I will attempt to address them in this article. Remember: I am not an attorney, so the information I am providing here is only a product of my research and my experience as a forensic accountant.
I have been retained by insurance companies in the past to investigate cases of suspected arson. My role was to determine whether there was a financial motive for arson. That is, was the financial condition of the person or business such (high debts, failing business, etc.) that there may have been a motive to commit arson to collect money under an insurance policy?
How does a land contract work?
A land contract is a common method of purchasing real estate. The buyer typically makes a down payment, and then makes monthly, quarterly, or annual payments on the contract (with interest at a specified rate) until a balloon payment is due. So for example, a buyer may agree to purchase a house for $282,500, with a down payment of $20,000, an interest rate of 6.95%, monthly payments of principal and interest, and a balloon payment due 8.5 months later.
This method of purchasing real estate is typically used with borrowers who cannot get a traditional bank loan to buy the real estate. Often, it is expected that the buyer will be able to qualify for bank financing at the time the balloon payment is due. For example, maybe the buyer is going through bankruptcy, and expects that by the time the balloon payment is due, the debts will be discharged in bankruptcy and then he or she will qualify for bank financing. The purchaser will secure a bank loan, and use the proceeds to pay off the seller on the due date.
What if the buyer defaults?
The purchaser of the real estate may default under the land contract several ways:
- By not making required periodic payments
- By not making the balloon payment on the due date
- By not paying real estate taxes and assessments when due
- By not insuring the property against loss
- By not paying utility bills
This is what the standard land contract form looks like in Wisconsin.
If the buyer defaults by failing to do any of the above, he or she may lose the down payment and any payments toward the principal owed. The seller may take possession of the property, and the buyer walks away from the property and the transaction, owing nothing more to the seller. (There are other remedies available under the Wisconsin land contract, but it is most typical for the seller to simply take the property back.)
What happens if the property is damaged by fire?
If the house or commercial property being sold under a land contract in Wisconsin is damaged or destroyed by fire (or another catastrophic event), the insurance proceeds are to be used to repair, restore, or rebuild the property if the seller deems it economically feasible. (i.e. The seller decides if it is worth it to repair or rebuild.)
If there was no insurance on the property, the seller is in a world of hurt. This is why sometimes the seller will maintain insurance on the property, rather than trusting the purchaser to do so. (The seller can also make arrangements to escrow and/or pay the real estate taxes, rather than trusting the purchaser to do so, because ultimately the seller is responsible for the taxes until the title to the property is transferred to the buyer.)
Why would a buyer commit arson?
Suppose a mysterious fire damages or completely destroys a house being sold under a land contract. Would the buyer have a reason to commit arson, particularly if the buyer is unable to make the balloon payment (because he or she can’t get bank financing, for example)?
It’s hard to say. I can only come up with two possible financial benefits to the buyer in a situation in which the house burns down or is severely damaged by fire:
- The buyer might walk away from the damaged/destroyed house and demand the return of the down payment. If the buyer knew he or she was going to default under the contract (unpaid taxes, inability to get bank financing, etc.), the likely result would be the loss of the down payment and any equity earned via the monthly payments. Arson might create an opportunity to avoid that loss and recover the down payment. I have no idea how such a situation is handled legally, or whether the buyer would have any grounds to demand the return of the down payment.
- Home insurance policies typically require the insurance company to pay for temporary housing after a property is destroyed. The period covered varies, and generally this benefit only kicks in if the house is deemed unlivable. There are also limits on the monthly expenses that insurance policy will cover. I suppose if the buyer knew he or she was going to default on the land contract and have to move out of the house, this could be a way of getting a new place to live (for a limited time) without having to pay out-of-pocket for it.
There may be other financial motives for arson in a situation like this, but I can’t think of them.
In my opinion, the above two “benefits” of a house fire on a property being sold under a land contract just aren’t worth it. The potential for injury is too great, and the consequences of being caught committing arson are too high. In our example above, the down payment was $20,000, which doesn’t seem to put enough money at stake to make the risks of arson worthwhile. Unless of course if you have a criminal mind, are so narcissistic as to believe you will not be held accountable, or are otherwise mentally unstable.
I suppose destroying your house might also have some side benefits… like explaining to your fan base why you’re moving your family AGAIN (without having to admit it’s because you’re a thief or financially irresponsible), or hoping to hide from creditors a little longer….