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How Land Contracts Work

In Ohio, a land contract, also called a land installment contract,  is an agreement by a seller to sell you land and a house on that land for an agreed price.  You, the buyer, agree to make monthly installment payments directly to the seller, plus interest, until paid in full.  The seller agrees to transfer the deed (ownership) to you after all of the payments have been made.

  1. Is A Land Contract Good or Bad?
  2. Is Every Agreement To Purchase Real Estate A Land Contract?
  3. Can I Buy A Mobile Home On A Land Contract?
  4. What Should I Do And Ask Before I Sign A Land Contract”?
  5. What Must Be Written Into A Land Contract?
  6. What Are The Seller's Obligations?
  7. Resources


IS A LAND CONTRACT GOOD OR BAD?

Buying a house on land contract is not the preferred way to purchase real estate.  The usual method is to borrow money from a bank, pay the full purchase price for the house and then make your mortgage payments to the bank.  This method is best because you own the house immediately.   Under a land contract, you will not own the property until you have made all of your installment payments.

Also under a land contract, until you have paid 20% of the purchase price or made five years of payments, if you miss a payment the seller can evict you from the premises just as if you were a tenant.  If this happens, you will loose your down payment, installment payments, real estate tax payments and possibly the value of any improvements you made to the property.

Because of the possibility of the buyer losing everything he invested in the property, land contracts are typically only used by buyers with poor credit who cannot obtain a bank loan to purchase the property outright.  On the other hand, land contracts help those who lack good credit to have a chance to own real estate.  Paying land contract installments for several years may even help convince a lender that the buyer is credit-worthy.

Because the land contract buyer is usually unable to obtain a mortgage loan to buy the property outright, the seller may be able to ask a higher purchase price and charge a higher than average interest rate.  Some land contracts are for relatively short time periods, for example five years, after which the buyer must obtain a bank loan for the remaining amount owed to purchase the property in one payment.  This payment is called a balloon payment.  A land contract that contains a balloon payment will be a problem for the buyer who cannot get a bank loan after five years and may cause the buyer to loose everything he paid for the house. 

However, it is critical before someone enters into a land contract that he establish a financial plan to fix whatever is preventing him from getting a loan.  Poor credit is fixable over time, but to fix it you must first know what is wrong with it and what to do to improve it.  A visit to a non-profit credit counseling agency will help you understand the problem and how to go about fixing it.

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IS EVERY AGREEMENT TO PURCHASE REAL ESTATE A LAND CONTRACT?

There are many agreements to purchase real estate such as a lease with an option to buy and rent-to-buy agreements that are not land contracts.  Land contracts are very specific and must conform to requirements found in Ohio Revised Code Chapter 5313.  For example, under Ohio law, the land contract must be for a home and the property the home sits on, not just land.  If you are considering a land contract, have a lawyer look over the agreement.  Land contracts generally involve many tens of thousands of dollars and can last for decades, so before signing one it is important to take the time to get a legal opinion.  Not all land contracts are the same.  The provisions of one land contract can vary substantially from another.

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CAN I BUY A MOBILE HOME ON A LAND CONTRACT?

A mobile (manufactured) home can only be sold on land contract if it is permanently affixed to (e.g., a part of) the land being bought.  One way to tell if the mobile home is a part of the land is to see if there are wheels attached or if it is on a permanent foundation.  But how the mobile home is treated for tax purposes is the only way to tell for sure if it is considered permanently affixed to the land.

Any mobile or manufactured home that is not taxed as real property is subject to an annual manufactured home tax, payable by the owner, for locating the home in Ohio.  See, Ohio Revised Code 4503.06(C).  If the tax department of the county auditor's office only collects real estate taxes on the property, then the mobile home is part of the land.  However, if the tax department is collecting a mobile or manufactured home tax, then it is not considered permanently affixed to the land and cannot be sold on land contract.

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WHAT SHOULD I DO AND ASK BEFORE I SIGN A LAND CONTRACT?

After you sign a land contract, you are legally bound by the terms of the contract.  The time to ask questions, get information and change the terms of the land contract is before you sign it.  Below are questions you should answer before you sign a land contract. 

 
  • Who owns the property you are buying? 

    The only way to be sure that the seller owns the property is to get a copy of the seller's deed and have your lawyer look at it.

  • Are there other mortgages, liens or land contracts on the property?

    The seller cannot give you clear title to the property if there are outstanding claims against the property.  All claims against the property must be filed at the county recorder's office.  Check there to see if the seller has clear title to the property.

  • Who is responsible to make repairs to the house and property?

    This should be part of the agreement.  Usually this responsibility falls on the buyer and can be quite expensive, for example if the septic system needs replaced.

  • What is the current condition of the property?

    Before a house is purchased, by land contract or otherwise, the buyer should throughly inspect it.  This is usually done by a professional housing inspector who can look at the furnace, roof, pipes, electrical and septic systems as well as inspecting for termites, mold, leaks and foundation cracks.  Talk to the neighbors and contact the property's prior renters or purchasers for further information.  If the seller agrees to fix something, get it in writing or it may not be binding after the contract is signed.

  • Who is responsible for taxes and insurance on the property?

    U
    sually the buyer pays these costs.  Find out how much they cost and make sure you can afford to pay for them as well as your monthly land contract payment.  The county auditor can tell you if there are any unpaid taxes due and owing on the property.

  • Will there be a down payment due at signing?

    What does the land contract say about the down payment if you miss a monthly payment and loose the house?  Most land contracts state that the buyer forfeits the down payment if he defaults on his monthly payments.

  • Who is drafting all the paperwork for the land contract?

    Normally the seller will have his attorney draw up the land contract.  However, the buyer has a right to have his attorney look it over in advance of signing it.  This is the buyers last chance to make any changes to the land contract.  Once the contract is signed, it is legally binding on all parties and cannot be changed unless both parties agree.  Also after the land contract is signed, the law requires that it be recorded at the county recorder's office.
 

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WHAT SHOULD BE WRITTEN INTO A LAND CONTRACT?

The Ohio Revised Code § 5313.02 requires that every land contract be signed in duplicate, providing a signed copy for both the seller and buyer and that the contract contain at least the following provisions:

 
  • The names and current mailing addresses of all parties to the contract;
  • The date the contract was signed by both parties;
  • A legal description of the property to be sold;
  • The contract price of the property;
  • Any charges or fees for services that are included in the contract separate from the contract price;
  • The amount of the buyer’s down payment;
  • the principal balance owed, which is entire amount to be paid for the property;
  • the amount and due date of each installment payment;
  • the interest rate on the unpaid balance and the method of computing the interest rate;
  • A statement of any encumbrances (mortgages, liens, etc.) against the property being sold;
  • A statement requiring the seller to deliver a general warranty deed on completion of the contract, or another deed that is available when the seller is legally unable to deliver a general warranty deed;
  • A provision that the seller provide evidence of title (a copy of the deed);
  • A provision that, if the seller defaults on any mortgage on the property, the buyer can pay on that mortgage and receive credit for such payments on the land installment contract;
  • A provision that the seller shall cause a copy of the contract to be recorded;
  • A requirement that the buyer be responsible for the payment of taxes, assessments, and other charges against the property from the date of the contract, unless agreed to the contrary; and
  • A statement of any pending order of any public agency against the property, such as an order to repair housing code violations.

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WHAT ARE THE SELLERS OBLIGATIONS?

The seller must, at least once year or upon your demand (but no more than twice a year) give the buyer a statement showing the amount paid in principal, amount paid in interest, and the remaining balance owed.  The seller must also record the land contract in the county recorder’s office where the property is located within 20 days of its signing.

When dealing with legal issues it is always recommended that buyers consult an attorney for legal advice.  If you cannot afford an attorney call 1-866-Law-Ohio or visit OhioLegalServices.org for your closest legal aid office.

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RESOURCES

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This website provides general legal information and not legal advice.  The law is complex and changes frequently. 
Before you apply any general legal information to a particular situation, consult an attorney. 
If you cannot afford an attorney call 1-866-Law-Ohio (1-866-529-6446) or visit OhioLegalServices.org for your closest legal aid office.

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