Could a land contract help you turn a property into income?
Maybe the stairs in the home you inherited from your parents are so steep you have to rebuild them for the property to qualify for a standard mortgage. Perhaps it just needs some sweat equity, but you don’t want to take a huge hit in the purchase price by selling to someone who flips homes.
You might even have a property in excellent condition that you would like to turn into a long-term stream of income rather than a one-time lump sum sale. Land contracts are a form of seller financing that can completely cut out real estate professionals and banks from a transaction, allowing the seller to keep more of the money and the buyer to pay fewer costs.
Benefits also include the ability to sell a property that a buyer can’t finance themselves or the opportunity to buy for someone who can’t qualify for a standard mortgage. Still, there are some limits that you should be aware of when considering buying or selling a property on a land contract in Ohio.
How are land contracts regulated in Ohio?
Land contracts were abused by unscrupulous sellers of land to take advantage of unsuspecting buyers. As a result, the legislature passed laws to protect buyers. Some of the provisions now required by Ohio’s laws include that the land contract be properly executed in duplicate so that both the buyer and seller have a copy. The contract must contain the names and addresses of the buyer and seller, be dated, contain a legal description of the property, and state the purchase price, along with any down payment made by the buyer. The interest rate, payment amount, payment due date, and any charges or fees for services that are includable in the contract separate from the contract price must be in the contract. If the property has other mortgages, or encumbrances, the seller must disclose these to the buyer. The land contract must contain a provision that allows the buyer the opportunity to cure any mortgage default by the seller, and receive a corresponding credit against the land contract for curing the seller’s default on the mortgage. Perhaps the most important protection to the buyer required under Ohio’s land contract law is that the seller must cause a copy of the contract to be recorded with the County Recorder within 20 days of signing. Recording the land contract protects the buyer against future mortgages or attempted sales of the property. If the seller does not record the land contract, the buyer should independently record the land contract to protect the buyer’s interests.
Once a year, the seller must provide an accounting to the buyer of the principal and interest paid on the land contract, along with the balance owed. At the end of the contract, the seller is usually required to provide a general warranty deed to the buyer. There are other provisions that must be followed in order to comply with Ohio’s land contract, and an attorney can help guide you through the legal requirements.
What happens if the buyer defaults on a land contract?
Every buyer is given 30 days under the law to cure a default. If the buyer does not cure the default, the seller may file a lawsuit against the buyer to declare the land contract forfeited, unless the buyer meets certain exceptions. If the buyer has paid in accordance with the land contract terms for five years, or if the buyer has paid at least 20 percent toward the purchase price of the land contract, then the seller may only foreclose on the land contract. Unlike a forfeiture where the buyer gets nothing, from the land contract foreclosure, the seller may only collect the unpaid balance owed on the land contract, and the buyer keeps any excess money as a result of the property being sold at a sheriff’s sale resulting from the foreclosure.
Not every property is eligible for protection under the land contract laws.
Ohio has limitations on land contract sales. One of the more unusual restrictions the state places on these agreements is the intentional exclusion of commercial and vacant land. Buyers using land contracts in Ohio are only protected by the law for a parcel of land that contains a dwelling. This does not mean commercial and vacant land may not be “owner financed” or sold through a different type of contract, called an executory contract, but the buyer does not have the protections afforded under the land contract law.
Additionally, the seller’s financial circumstances might affect whether they can afford to offer a land contract. Those who don’t own their property outright yet or who have a high principal balance on their mortgage may not be able to sell the property on a land contract. There cannot be a mortgage worth more than the land contract for the seller to offer one as a financing option. Sellers should also be aware that most residential mortgages prohibit selling an interest in the mortgaged property pursuant to a land contract.
What should a buyer do prior to entering into a land contract?
Before entering into a land contract, a buyer would be well-advised to have a title search done on the property to see if the seller actually owns the property. More than one buyer has entered into a land contract that was too good to be true just to learn that the seller had no right to sell the property. A title search will also tell you if the seller has other judgments or liens that would affect the value of the property. Title exams are very affordable compared to buying a property that you later learn has an IRS lien, a mechanic’s lien, or multiple mortgages for more than the value of the property.
If you are unsure what a property might be worth, have an appraisal done to determine the value of the property. If the seller has inflated the price in order to offer the property for sale on a land contract, consider other options or other properties.
Hire an attorney to help you with the paperwork required for a land contract. An attorney with familiarity in dealing with land contracts will know what terms are required to make an enforceable land contract for both buyers and sellers. These expenses may seem burdensome initially, but will save both buyers and sellers a lot of trouble in the event of a default.
As a seller, as with any arrangement where you allow someone to take up residence in a property you own, you also run the risk of the people living in your property damaging it during their time there. Background checks, credit checks, and down payments will help identify buyers that represent a low risk. Damaging the property is not significant if the buyer completes the purchase, but it can be an immense problem if the purchase falls through and the seller has to rehab the home due to damages.
The land contract documents you execute are a crucial form of protection for you as a buyer or seller. Ensuring that you tailor the terms of your document to your needs can minimize the risks that you take when selling or buying a property on a land contract.