Installment sales agreement

Written by david carnes
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In an instalment sales agreement, the buyer takes possession of the property immediately and pays the seller over time in periodic instalments. Since the seller is financing the purchase of the property, this type of sale is popular during times when credit is hard to obtain. Instalment payments also help the seller defer capital gains tax.

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Liens

Before you purchase property under an instalment sales agreement, you should check to see if the seller owns the property free from encumbrances such as liens. If you are buying real estate, then apply for title insurance and the title company will perform a title search before issuing a policy. If you are buying a car, then check the vehicle's vehicle identification number---it is engraved on the body of the car somewhere. You can use the car's VIN to get the car's lien history, either online or at the state Department of Motor Vehicles.

Identification of the Property

Your instalment sales agreement should clearly identify the property being transferred. If you are transferring title to real estate, a copy of the title document should be included as an appendix to the contract. If you are selling a car, then you should include make, model, year and VIN. If you are selling commercial goods that are not unique (furniture inventory, for example), a detailed list appended to the contract should be sufficient.

Payment Schedule and Breach

Any instalment sales agreement should include the basic price, interest and a list of exact dates when payments are due. You should also specify what penalties are applicable to the buyer if payments are late or missed altogether. Remember that these penalties must be directly proportional to the loss that the seller suffers---punitive provisions will not be enforced in any U.S. jurisdiction.

Default Provisions

It is important to specify in an instalment sales agreement exactly what buyer conduct will result in the seller's right to declare default and file a lawsuit to repossess the property---how many payments must be missed, for example. If you are a seller, you should also try to negotiate a provision giving you the right to declare the buyer in default in the event of a sudden adverse change in the buyer's financial status (bankruptcy, for example).

Contract Boilerplate

Don't to forget to add standard contract "boilerplate" provisions (see Resources). Governing law and dispute resolution clauses are particularly important. The provisions are not meant to be standardised---they should be modified to fit the specific terms of your deal.

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