How does a Land Contract work?

Question

Hi everyone,

I've finally gotten a seller I've been working on to sell his investment property to me. Better yet he wants to sell it to me under a land contract. Due to some tax reasons he stands to walk away with a better balance next fall (Fall 18'). He lives out of town and in the meantime I would take over management (land contract).

Let's say we agree at $150,000 price due September 18'. How are land contracts set up? I plan on getting a RE attorney involved but wanted to understand the basics first. Would I pay him the mortgage plus $/month in the meantime. Would someone please share they're experience or knowledge of land contracts please?

Thank you!

Josh Zoerner · Answer

Your terms are going to be key for cash flow and ROI. Whatever contract paperwork your attorney suggests you use (land contract/lease-option) is how you should set it up.

But; your interest rate should be at or below market, and with 30 year or interest only amortization since he is leaving you with future interest rate risk. (Even though in my opinion rates aren't going up much, any time soon)

If the seller is suggesting a closing in a year, for tax purposes you have a unique advantage and some liability. Make sure you are getting paid for that (excellent terms): low down, low monthly. (maybe with a right to extend, at your option) Good luck!

Jon Holdman · Answer

This of it like a car loan.  With a normal RE purchase with a mortgage or deed of trust, the buyer has legal ownership of the property.  Like having the title of a car.  The borrower (usually same person as the owner) gives the lender a mortgage or deed of trust which conveys a security interest in the property as security for the loan.  The mortgage or deed of trust gives the lender the right to foreclose and force a sale of the property.  That is, a "sheriff's sale".  The winner of that sale (often the lender) takes possession of the property.

With a car loan, the lender has legal ownership of the vehicle and holds onto the title.  Only when the loan is paid off does the lender transfer legal ownership by signing off on the title and delivering it to the person who probably thought they owned the car all along.  Same idea with a land contract.  The seller continues to own the property.   The buyer takes possession, and usually responsibility for upkeep, taxes, insurance, etc.  The buyer makes payments, per the terms of the contract.  Once the contract is satisfied, ownership is transferred.

Note that this does not avoid the due-on-sale clause in the seller's loan, if there is an outstanding loan.  Ideally this transaction would be done by a title company or attorney and recorded so it protects the buyer's interest in the property.

Michael Plante · Answer

what state?

Here is OH land contract law

http://codes.ohio.gov/orc/5313

Google is your friend

Jon Holdman · Answer

You definitely want an attorney.  These deals are something of a no-mans-land between real seller financing with a mortgage and a plain lease.  They give the buyer more control than a lease option but not as much as a true mortgage.  And, like lease options, can be predatory.  Know your rights and what you're getting into.

Michael Plante · Answer

check your state laws.  Some states consider a land contract as they would a mortgage

How does a Land Contract work?

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