A land contract provides a rent-to-own structure which enables someone to purchase real estate with little to no cash down payment. Called contracts for deed or land installment contracts in some states, land contracts require the buyer to make monthly payments towards purchase of the real estate to the seller.
Part of each month’s payments is for rent, and part is to pay for the real estate. When the total payments reach the agreed upon purchase price, the buyer becomes the owner of the real estate.
Land sale contracts give access to home ownership to people who otherwise might never be able save enough for a down payment. Land contract sellers may not require buyers checks, so buyers with poor credit histories who might not qualify for a mortgage have an opportunity for home ownership.
Land sale contracts can benefit sellers too. They may allow for favorable installment sale tax treatment for a seller. Because land contracts may not include title insurance or involve real estate brokers, sellers have lower transaction costs.
Land sale contracts also have drawbacks. These contracts frequently involve either an inflated sale price or high interest payments. This can reflect additional seller risk due to the lack of a down payment and possible buyer credit history. Or it can be due to seller exploitation of an unsophisticated buyer.
If a buyer misses a payment, they may lose the property without getting any of their money back from the seller. The buyer also may forfeit any improvements they have made to the property. In some states, the seller can easily evict a buyer without compensation even if the buyer has made payments for many years.
Plus, unless the buyer hires an attorney or title company before signing the land sale contract, the buyer might discover that the seller doesn’t own the real estate free and clear. If the real estate is subject to a mortgage and the seller doesn’t make mortgage payments, the buyer can lose the property in a foreclosure even if they have made all payments under the land sale contract.
A land contract should be recorded in the county real estate records. If the land contract is recorded, then the buyer has priority over later seller debts.
However, some land contracts don’t get recorded. If the contract isn’t recorded, the seller could easily put a new mortgage on the property. Also, since the seller retains title, the buyer also can lose the property to a seller creditor claim without receiving notice or a hearing. The buyer also can lose the property if real estate taxes aren’t paid.
Ohio lawmakers recently have proposed House Bill 103, which would change land contract laws in that state. Patterned after consumer protection laws, House Bill 103 would severely limit the interest rate on land sale contracts and implement safeguards for buyers.
The bill would prohibit sellers from having a mortgage on real estate subject to a land sale contract. And sellers would have to pay all real estate taxes, assessments, and homeowner’s insurance premiums during the term of the land sale contract. Sellers, rather than buyers, would have to make repairs to the real estate during the land contract term.
The only way to avoid these requirements is for both the buyer and the seller to hire separate Ohio attorneys to represent them.
House Bill 103 also would require sellers to provide buyers with a certificate from the building department verifying the real estate complies with building codes. Plus, a seller would have to provide the buyer with a real estate appraisal.
And under House Bill 103, land sale contracts also would become subject to the US Truth in Lending Act. This would require seller disclosures and rescission rights like those required for consumer loans.
Buyers also could sue sellers who didn’t comply with the proposed law. Possible buyer remedies would include return of all payments under the land sale contract, title to the real estate, up to two percent of the principal amount under the contract, and court costs and attorney fees.