When a Land Contract Is a Good Idea—and When it Is Not

A land contract is a kind of seller-financed agreement that can be advantageous for both the seller and the buyer. However, there are disadvantages on both sides, so it is important to work with an attorney to make sure you are protected. We take a look at land Ohio contracts from the buyer’s and seller’s perspectives.

Land Contract Basics

Land Contract MapSimply put, a land contract is a way to pay monthly installments to buy a property without taking out a mortgage. The buyer lives in the house while making direct monthly payments to the seller. No bank or lender is involved. However, the deed and legal title to the house stay with the seller until the installment payments are complete; so in that way, the buyer is like a tenant with an obligation to buy the property. Why would anyone want a land contract instead of buying a house outright? Buyers and sellers have different reasons.

Buyers Don’t Need a Mortgage to Get a House

The main reason a buyer would agree to a land contract is that they cannot come up with a down payment or get approved for a mortgage to buy a house the traditional way. If you have bad credit and can’t get a loan, this could be a way for you to move into a house immediately and work towards owning it eventually. In some cases, you can go to a bank after a couple of years of regular land contract payments and get approved for a loan.

Investors interested in flipping houses often seek land contracts so they don’t have to have a lot of cash on hand and can renovate and sell the house without ever needing to take out a mortgage. The risks a buyer assumes include the following:

  • You might still need a loan. Most land contracts are set up with a balloon payment due after a certain amount of time. If you can’t make that payment when it’s due, you might need to apply for a mortgage to do it.
  • The title is not in your name. You will not own the property until you have made the final payment, even though you are responsible for upkeep and property taxes. If the seller defaults on their mortgage, you could lose everything you have invested so far.
  • You can be evicted. Until you have been making payments for five years or have paid 20 percent of the purchase price, you can be evicted for missing just one payment. In this way, you are like a tenant, and all the money you have been paying towards the purchase price will be lost. After five years or 20 percent, you can still be kicked out, but it is a more complicated process for the seller.

In many ways, the buyer in a land contract is in a kind of limbo. That’s why it’s important to make sure the land contract you sign is fair to you.

Sellers Also Take Risks With Land Contracts

Why would a seller agree to a land contract? For one thing, it can be a way to unload a property that has been difficult to sell. As the seller, you also get to keep the buyer’s down payment, no matter what happens with the contract. Once the buyer takes possession of the house, you are no longer responsible for maintenance, repairs, upkeep, or taxes—which you would be if you were renting the house. If the buyer cannot keep up the payments and breaks the contract, you keep what they have paid and can still sell the house for its full value. What are the risks?

  • You will have to vet the buyer. Since there is no bank or mortgage company involvement, it will be entirely up to you to determine whether the buyer is financially capable of upholding the contract.
  • If the buyer defaults after paying 20 percent or five years, you will have to formally foreclose on the property to get them out.
  • If the buyer has not taken care of the property and defaults, you will get the house back but at a potentially significant loss.

With a well-written land contract, you can make sure you’re as protected as possible.

Don’t Enter a Land Contract Without a Lawyer’s Input

At Littlejohn Law, our real estate legal team has experience drafting and reviewing land contracts and will advise you as our client—whether you are a buyer or a seller—to protect your interests in the agreement. If you need legal help after a land contract has been broken—again, whether you are the buyer or the seller—please call us to help you protect your rights. Land contracts can be advantageous to both parties, and they can also be a nightmare for one. Don’t let the nightmare happen to you. Consult our team sooner rather than later!

 

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