What Is a Land Contract In Ohio? Full Guide [2020 Update]
In real estate, buyers and sellers must be knowledgeable to make informed decisions. Are you familiar with a land contract in Ohio, as well as the state-specific requirements? What is a land contract in Ohio, really? Essentially, a land contract is an alternative financing option if you’re investing in:
- Farmland or raw land
- Multifamily housing
- A commercial building
- A home or condo
While a land contract might be ideal for you, there are important details you need to know, first. So, what is a land contract agreement, and how does it work? Let us give you a lay of the land (pun intended)! Learn how you, the real estate investor, can avoid the bank and make an agreement directly with the seller.
What Is a Land Contract?
A land contract, also known as a land installment contract, is an executory financing agreement between a seller and a buyer. The contract is essentially a seller-financed lending agreement for the purchase of a property, which requires the buyer to pay monthly installments until a balloon payment is due.
Before we get too technical, let’s break this down in a way that many people can relate. The basic foundation behind a land contract in Ohio is similar to financing a new car, with some key differences. But how does a land contract work? Let’s use the example of heading to the dealership to find the latest Nissan in the showroom. Chances are you won’t be paying cash on the spot for the entire payment. Instead, you set up installment payments with a bank or lender over three, five, or even 10 years. The car is yours with the obligation to make those payments each month. Otherwise, you risk defaulting on your loan and losing your car to the bank or lending institution that financed the vehicle.
Think of a land contract as a car payment… but instead of a car, you’re making payments on a commercial property. Hmm, similar to a car payment; right?
How Do Land Contracts Differ From Other Loan Agreements?
You may have noticed by now that a land contract sounds similar to a mortgage. The big difference is that you are not borrowing money from a bank or lender and paying back the purchase price plus your mortgage payments to the bank. Instead, you are paying these installments to the seller. As such, some investors that purchase Ohio property for sale for the purpose of flipping consider offering a land contract for their real property.
Aside from direct payments from the buyer to the seller, land contracts differ from other loan agreements, as follows:
- Direct payments from buyer to seller. The buyer makes an initial down payment to the seller directly and then continues to pay monthly installments of the principal plus interest over a specified period. The agreement is solely between the buyer and the seller, and there is no bank or lender involved.
- Deed remains with the seller. While the buyer takes possession of the property, as with mortgages, the seller retains the deed and legal title to the property as security and collateral until the installment payments are completed. At that time, the seller then transfers the deed to the buyer.
- Obligation to buy. Unlike lease-to-own agreements, where lessees typically have the option to purchase the property at the end of the leasing term, a land contract requires the buyer to agree up-front to pay the full price of the real estate.
- Equitable title for the buyer. Once the buyer begins making payments on real estate under a land contract, the buyer carries an equitable title, and financial interest, in the property in which the money is being invested.
What Is the Difference Between a Land Contract and Lease-to-Own Agreement?
The short answer is, “Yes.” We’ve talked ad nauseam about land contracts, so what is a lease-to-own agreement? In a lease-to-own agreement, the buyer has the option to purchase the property at an agreed upon price. It might be easier to think of the “buyer” as the “lessor” and the “seller” as the “lessee” because ownership is not changing hands.
On the flip side, a land contract is the sale of a property, where the seller finances the deal. So, what are the benefits of a lease-to-own agreement for the buyer? First and foremost, specific costs associated with the property, namely taxes and insurance, are not the responsibility of the buyer. In addition, there is no obligation to buy the property in a lease-to-own arrangement. As such, depending on the specifics of the agreement, the lessor can walk away if they are unsatisfied with the property.
For the seller or lessee, a lease-to-own agreement offers an “option-to-buy” fee at the execution of the contract to encourage the buyer to purchase the property eventually. And, while they are still responsible for taxes, insurance, mortgage payments, and maintenance fees on the property, the seller can more easily evict a buyer because they do not have any claim of ownership.
What Is a Commercial Ground Lease? And, Is It the Same as a Commercial Land Contract?
While the word “ground” and “land” may be synonymous in the thesaurus, that’s where the similarities between a ground lease and land contract (in Ohio or any other state) end. At its most basic level, a ground lease is not a sale of land, but rather a rental of land to a tenant that plans to build on the property. Typically, a commercial ground lease is a long-term commitment (from 50-99 years).
Why would a tenant opt for a ground lease? In most cases, tenants seek ground leases for land in high traffic or well-populated areas because often such land is cost prohibitive. And, since the tenant has the desire to build on the land, they prefer to direct funds toward construction costs rather than upfront costs associated with a commercial real estate purchase.
For the landowner, a commercial ground lease allows them to retain control of the land while enjoying a steady stream of income from the tenant. Furthermore, the tenant is responsible for all costs for improving the land, thus, increasing the overall value of the property.
Land Contracts Sound Too Good to Be True… What’s the Catch?
Many commercial real estate investors favor a land contract in Ohio because they require less capital for down payment compared to traditional loans. Also, since the property can start being utilized once the contract is signed, this method allows the investor to begin quickly using the property.
Land contracts also do not require involvement with banks, lenders, or real estate agents. As such, this makes them easier to obtain compared to traditional loans. Additional expenses that come along with these third parties, such as credit underwriting and closing costs, are eliminated.
Benefits of Commercial Land Contracts
A land contract is an appealing option for both buyers and sellers when it comes to commercial real estate.
If you are a commercial real estate buyer (or investor), the following are a few benefits that you can reap through your commercial land contract.
- High degree of protection. As the buyer, you’re able to obtain the title insurance on the property and register the sale within the county, up front. This will bring to light any restrictions or liens that may be on the property, and eliminates the possibility of the seller trying to sell the property to someone else over the 3-5 year contracted period.
- Tax advantages. Buyers can claim property taxes, the value of improvement projects (i.e., energy-efficient fixtures), and the mortgage interest as tax deductions.
For commercial real estate sellers, land contracts can be just as attractive. Some seller benefits include:
- Reduction in fees. In a land contract, a seller can earn a proper selling price for the real estate without the added costs of closing.
- Maintenance and tax liability lifted. Land contracts give the buyer the opportunity to inhabit the property immediately. While you as the seller still hold the deed and the legal title to the property, the buyer will usually adopt the responsibilities of both property maintenance and taxes.
And, the Risks of Land Contracts… Summarized
As with any real estate investment, there are risks and challenges when executing land contracts in Ohio, as well as in any other state. Below are a few pitfalls to consider as an investor:
- The possibility of still needing a loan. Some buyers may still end up needing financial assistance towards the end of the stipulated period. That’s because the land contract typically has a “balloon payment” at the end of the agreement. Many buyers end up applying for financing at this point, in the form of a mortgage. However, if the buyer chose the land contract route initially because that buyer could not get approved for a traditional mortgage, they might be stuck in the same predicament if they cannot cover the remaining amount on their own.
- No legal title. As the buyer, you do not own the property until you have made your final payment. While you may inhabit the property, perform the upkeep, and pay the taxes, the property is not legally yours until the full price agreed upon in the contract is met. As such, the buyer has an equitable title, not a legal title to the property. Seller risk comes into play here. If the seller ends up defaulting on their mortgage, the buyer is at risk of the contract becoming null and getting evicted.
- Risk of eviction. Until you have paid 20 percent of the purchase price, or made five years of payments, missing just one payment is grounds for eviction – just as if you were a tenant, renting. Also, if you are evicted from the property, you will not only lose your down payment, but also any installment payments made up until that point, as well as the value of any improvements you have made to the property.
On the flip side, if you are entering into a land contract as a seller, the following key points should be addressed:
- The sale is not guaranteed. If the buyer defaults on your land contract, you are entitled to regain possession of your property and keep the payments made thus far; however, the buyer is not obligated to complete or owe you the remainder of the sale amount.
- Financial due diligence is your responsibility. With the absence of a bank or lender, you, as the seller, are operating as that party. Therefore, it is your obligation to vet your buyer and ensure that they are financially capable of entering the contract.
- Maintenance is out of your control. Maintenance of the property is the responsibility of the buyer once both parties sign the contract. What happens if the buyer defaults on the loan and is evicted but does not maintain the property well? The responsibility then shifts to the seller.
What Questions Should You Ask Before Entering a Land Contract?
Once you execute a land contract, you become legally bound to the terms and conditions laid out. Therefore, it’s critical that you understand exactly what you’re getting yourself into. Below are some questions that you should ask the seller before you even consider a land contract in Ohio.
- Who legally owns the property for sale?
- What is the condition of the land and property?
- Are there any outstanding claims against the property?
- Is there another land contract already on the property?
- Is the buyer or seller responsible for maintenance of the land and property?
- What is the required minimum down payment?
- Is there a grace period for the installment payments?
- Which party is responsible for drafting the land contract?
Ensure complete answers to all questions listed above (and many more) with proper legal representation. Additionally, a thorough inspection, land appraisal (as well as an appraisal of property, if applicable), and financial and credit history review should be performed on both sides.
What Are the Requirements of a Land Contract In Ohio, Specifically?
According to Nolo.com, land contracts in Ohio and across the United States pertain to “real estate such as vacant land, a house, an apartment building, a commercial building, and other real property.” That said, when executed in Ohio, land contracts cannot be entered into over vacant land. A permanent building must exist on the land for the contract to be considered valid.
Requirements can vary from state to state, but when executed in Ohio, land contracts must include specific details, such as the following:
- Personal information. Full names and current mailing addresses of all parties directly involved
- Specific dates. The execution date of the land contract in Ohio by both parties as well as specific payment dates and deadlines
- Full description of the property. A legal description of the property to be sold, including its location
- Total sale price, down payment, and payment schedule. In accordance with the specific dates mentioned above, all financial obligations must be on the record; the obligations include:
- Total sale price
- Date and amount of the down payment
- Principal balance owed (total sale price plus any fees for services, minus the down payment)
- Amount of each future installment payment and due date for each payment
- Interest rate. The rate agreed upon, which will be charged on the unpaid balance
- Frequency of statements. A predetermined frequency (either biannual or annual) of statements showing the amount credited to the principal and interest, as well as the balance due
- Disclosure of encumbrances. A statement of any encumbrances against the property, such as liens, mortgages, etc.
- Promise of deed transfer. The seller must sign and agree to transfer the property’s general warranty deed once the buyer has completed their payments
- Any additional charges or fees. For services that are included in the land contract but separate from the contract price
For further information, the Ohio Revised Code – Chapter 5313 provides requirements and other pertinent information on land installment contracts regarding real property in Ohio.
Recording a Land Contract In Ohio: Who Does It, and How?
Upon execution, the land contract in Ohio must be recorded with your local county recorder’s office. In Franklin County, Ohio (where The Robert Weiler Company is based), you can find the recorder’s office in Columbus on 373 S. High Street, 18th floor. Search OhioRecorders.com for an office near you. Be aware that, within 20 days of signing the agreement, you must file a record of the land contract in the office where the property is located.
As described above, when entering a land contract, Ohio has specific requirements that you must meet. Make sure you research these requirements, as well as the property you are considering. Anytime you are about to enter a binding agreement, you should consult an attorney for legal advice. Contact the Ohio State Bar Association to find an attorney in your area. Alternatively, if you’re unable to afford an attorney, reach out to Ohio’s legal aid program at 1-866-Law-Ohio. Their programs cover all 88 counties in the state. And, their team can assist you with the execution of your land contract in Ohio.
How Can The Robert Weiler Company Assist With a Land Contract In Ohio?
The world of real estate can be complex; let the team at The Robert Weiler Company untangle the layers for you! Interested in purchasing commercial real estate and want to pursue a less traditional route? A land contract in Ohio may be ideal for you.
Our skilled commercial brokerage team has a personal connection to the greater Columbus, Ohio community for over 80 years. We come with a deep understanding of the market as well as a meticulous and up-to-date knowledge of the industry. As such, we have the expertise to elaborate further on your questions, “How do land contracts work?” and “What is a land contract in Ohio?” Speak with one of our CRE brokers today at 614-221-4286.