Forfeiture Clause in Real Estate

Instructor: Tisha Collins Batis

Tisha is a licensed real estate agent in Texas. She holds bachelor's in legal studies and a master's degree in criminal justice.

This lesson will define the forfeiture clause in real estate. Additionally, it will provide examples of forfeiture clauses in real estate so that the reader will understand the impact forfeiture clauses can have on consumers.

Losing Your Land

Cindy and Heath bought an amazing piece of land two years ago. It is at the edge of a canyon just a few miles outside of their hometown with gentle slopes and abundant wildlife. There is plenty of room to roam with 100 acres, and they have had big plans since the day they signed the papers that made those 100 acres theirs. They hoped to be able to build their dream home and raise their family in the peace and quiet that only the country could provide.

Unfortunately, Heath lost his job. Cindy was a stay-at-home mother and hadn't worked in years. Despite searching frantically, Heath couldn't find a job anywhere. Their savings dwindled and they got behind on their monthly payments on the land. What would happen now? They had paid on the property for two years and made a huge down payment when they purchased it. Could their land be taken away from them?

Definition of the Forfeiture Clause

When a buyer purchases real estate and has an installment contract to make payments on that real estate, he has an obligation to make those payments. If he fails to make those payments, the seller can terminate the contract. Then, the seller can take possession of that real estate back and keep everything that the buyer has paid in to the property so far. This is a forfeiture clause in real estate.

It can be extremely harsh on the buyer, since he may lose every penny he has invested. On the other hand, it's great for the seller who faces the possibility of keeping the money he has received and getting the property back. A forfeiture clause is a seller's remedy in case of default. This could happen in Cindy and Heath's case if they had a forfeiture clause in their contract. They would lose their down payment and two years' worth of payments, while the seller would get the land back and keep their money.

Cash Does Not Grow on Trees
cash

Examples

Steven and Kathy inherited some land several years ago. They intended to use the land to hunt for recreation, but never seemed to be able to find the time. Five years ago, they decided to sell it. The buyer put several thousand dollars on it, and signed an installment contract. Steven and Kathy allowed the buyer to finance the land through them because the buyer didn't have great credit. It seemed like a good idea at the time, since they weren't out of pocket as it was. Six months ago, their buyer stopped making payments. They tried to contact the buyer to find out what was going on. After six months of trying, they were fed up. They pulled out their contract and read the entire thing. It had a forfeiture clause in it, and the way they understood it, they could get the land back and keep all their money. A quick phone call to their attorney verified that they were right. Immediately, they began the process to take back the property.

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