Considering a Land Installment Contract in Ohio

Alternative financing arrangements can have advantages—and disadvantages

If you’re buying or selling a house, certain procedures and financing options are so commonplace they’re unquestioned in many transactions. But, because the purchase or sale of a home is one of the most significant financial events in a person’s life, a one-size-fits-all solution is hardly ever the best choice

One arrangement worth considering, whether you’re the buyer or the seller, is a land installment contract.

What it is

A land installment contract in Ohio is an alternative to a traditional mortgage, wherein the buyer makes regular monthly payments to the seller. No banks or approvals are required to enter into this type of arrangement, and generally there is considerably more flexibility—and fewer protections—because of this. Under a standard installment contract for real estate, the seller retains ownership of the property until the purchase price is paid in full, while the buyer maintains possession for the payment term and has a recorded equity interest. Because the basis of the arrangement is a contract between the parties, creative solutions may be available to address individual concerns.

Pros and Cons: Buyer

A land contract can be attractive to a buyer because:

  • There are no origination fees or closing costs, which can save thousands of dollars
  • Often a smaller down payment is required
  • The buyer can’t get a mortgage due to poor credit, inadequate employment history or other reasons, but yet can manage regular monthly payments
  • The process is quicker, simpler and more flexible than bank financing
  • Interest can be deducted like regular mortgage interest
  • Having a direct relationship with the seller can allow for flexible negotiation on terms like price, payment schedule, pre-payment options, title encumbrances and improvements

Downsides for buyers include:

  • The buyer doesn’t own the property until the contract is paid in full, and can sacrifice all payments in the event of default
  • Disclosures about the property aren’t required, and risks include an excessive price or undisclosed liens on the title
  • Buyer arranges for title examination, appraisal and inspection
  • Risk of seller abuse, meaning high interest rates or large balloon payments that increase potential default
  • Considerably shorter time to cure default than with a traditional mortgage (40 days in Ohio, as opposed to six months)
  • Using installment payments to improve your credit for a mortgage can depend on the seller reporting payments to a credit agency
  • Seller isn’t required to maintain good title until transfer of title on full payment

Pros and Cons: Seller

Upsides for a seller to consider:

  • The sale can be quick and save costs
  • Title examination, appraisal and disclosures are the responsibility of the buyer
  • Can be a good option for selling non-conforming property that wouldn’t qualify for financing
  • Can earn regular income from real estate, potentially while still paying on the seller’s mortgage (with approval of mortgage lender)
  • If the buyer defaults, the process to reclaim is quicker than foreclosure; the seller may keep all money paid and also reclaim the property if the buyer has made payments for less than five years

Concerns a seller may have include:

  • Property, and potentially a mortgage, will remain in your name for many years during term of contract
  • Seller won’t receive all their money until completion of contract
  • A contract will take more ongoing obligation than would an outright sale

The best way to ensure that a land installment contract is more advantageous than problematic is to work with a lawyer to negotiate and record a favorable agreement. Paying a lawyer to assist with a land installment contract can cost considerably less than the agency fees and closing costs associated with a typical real estate transaction; it’s well worth the protection.

If you think a land installment contract, or other owner financing option, makes sense for your real estate transaction, talk to a residential real estate attorney who has experience drafting these kinds of agreements. For more information on this area, check out our overview of real estate laws.

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