A land contract is a written agreement between a person who
has sold property (the Seller or Vendor) and the person who bought that property
(the Purchaser or Vendee).
- A land contract is an alternative way to buy real estate
in which the seller provides the financing.
- A land contract splits title into two parts - legal
and equitable.
- Legal title remains with the seller until
the land contract is paid off.
- Equitable title is what is given to the
buyer at closing.
- The buyer with equitable title is deemed the owner of
the real estate and must insure it, pay real estate taxes, and pay for it.
- If the buyer defaults, the seller has the right to foreclose
on the land contract, keep all the payments that were made, and get the
property back without sheriff sale or a long redemption period.
- Land contracts give the seller more rights to get the
property back quickly if a buyer defaults than a real estate mortgage does.
- Selling the property on a Land Contract provides a quick
and inexpensive way to sell the property without the rigid guidelines, hassles
and delays of bank financing.
- The contract also provides the Seller with monthly income
and a good rate of interest, while using the property as collateral.
Although land contracts are relatively simple documents, we
suggest that you have a legal professional or Title Company prepare them for
you. By law, we may not offer legal advice or prepare the final documents.
But, as a real estate broker, we are equipped to guide you through these
transactions in concert with competent legal professionals.
Beware: if a real estate
agent attempts to write a land contract for you, ask "Are you a licensed attorney
in the state of Ohio?" If the answer is, "No." ... then it illegal for him/her
to do so, and your contract may be deemed void in a court of law.
And, yes, RE/MAX Valley. does maintain an
inventory of owner-financed properties. But, more importantly, we are
willing to go out and shake some deals loose for you.
- Parties
to the Contract
- Legal Description
- Price
and Terms of Payment
-
Purchaser's
Duties
- Taxes and
Insurance
- Seller's
Right to Mortgage
-
Seller's Duty
- Default
- Assignment
of the Contract
- Miscellaneous
Provisions
- Signatures
and Notary
The contract begins with the "parties"- the people (and
their addresses) who are entering into the contract. The "Seller" (Vendor)
is the person who sold the property and is usually listed first. The "Purchaser"
(Vendee) is the one purchasing the property and is usually listed after the
Seller. The date of the Contract is here at the
beginning as well. Interest starts to "accrue" (begins being owed to the Seller)
starting from the date typed in, at the top of the contract. Consequently,
when the first payment is due, one month's interest is usually already owed,
since it is paid in arrears.
The Seller agrees to convey (sell) to the Purchaser only,
a carefully described parcel of land. This description must be exact. When
the purchase is completed and paid off, this should match the description
on the deed. The city, village, or township of the property is noted, together
with the county and state. Along with the actual
"earth" sold, the Seller also conveys such things as any buildings, easements,
tenements, improvements and appurtenances. In short, the Seller conveys everything
that is permanently affixed to the property.
This area should contain all the figures and dates:
Total purchase price, down payment, beginning
balance remaining (the purchase price minus the down payment), monthly payment
(or annual or semi-annual payment), an interest rate (usually stated in terms
of an annual rate), the date of the "balloon" payment (if any), and date that
the first payment is due. Purchase Price
- The Purchase price (sometimes
referred to as "consideration") is negotiated between the Seller and the
Purchaser. Properties sold on a land contract often sell for more
than properties that are sold for cash because the Seller provides the all-important
financing.
Down Payment - The down payment
is usually 10% to 20% of the purchase price. From the standpoint as the
Seller, the bigger the down payment the better. It represents money that
does not have to be collected in the uncertain future and it also represents
the Purchaser's commitment to the property. Sometimes, non-cash down payments
(barter items such as used cars, snowmobiles, applied rent, etc.) are used
as a down payment. This can be a very creative way to structure a sale!
Balance Remaining - Initially, this amount is the
purchase price minus the down payment. The balance remaining will go down
each month with the payments made by the Purchaser. An amortization schedule
shows how the balance will be reduced if monthly payments are made on time.
Monthly Payment - The monthly payment is usually
about 1% of the beginning balance. If after the down payment the Seller
is owed $20,000 by the Purchaser, the monthly payment will probably be in
the neighborhood of $220. The smaller the monthly payment, the longer it
will take to pay off the land contract and the larger the monthly payment
the faster the contract can be paid off. Payment Due Date - This is the date when the first payment is due and
usually the day of the month each consecutive payment is due.
Grace Period - A grace period in some contracts
permits the Purchaser a few days each month during which he or she may fail
to make payments and not be considered in default. Some contracts provide
for a late fee if the payment is not received on time or within the grace
period. Grace periods and/or late fee clauses are usually typed in as miscellaneous
provisions at the end of the land contract. Many people mistake the last
day of the grace period as the payment due date. Remember that even though
a late fee you is not charged, the payment is still late.
Balloon Payment - If a contract contains a clause
that reads something like, "the entire purchase price and interest shall
be fully paid within 5 years from the date hereof, anything herein to the
contrary notwithstanding," then there is what is known as a "balloon" in
the contract (a five year balloon, in this example). A balloon payment is
the term used for a lump sum, final payment on the contract. Balloon clauses
usually call for the final payment to be made on a specified date. If the
Purchaser fails to make a balloon payment when required, this will constitute
a default on the contract. Interest Rate
- The interest rate is usually stated in annual terms, (e.g., 11%). When
recording each payment made, interest is calculated for the payment period
(usually monthly) by multiplying the interest rate by the balance due and
then dividing this annual interest amount by the number of payments to be
made each year. This number (total interest for the period) is then deducted
from the payment. The rest of the payment is known as the principal portion
of the payment and is deducted from the remaining principal balance on the
contract. It's not as confusing as it sounds. Lets look at
the following example:
- Consider a land contract that has a sale price of $25,000,
- A down payment of $2,000,
- A remaining balance of $23,000, payable with monthly
payments of $250 at 11%.
- The interest portion of the first payment will be $210.83
($23,000 X .11 ¸ 12 payments per year)
- The principal portion of the payment will be $39.17
($250 - 210.83).
- The remaining principal balance on the contract after
the first payment will then be $22,960.83 ($23,000 - $39.17).
The person responsible for making tax and insurance payments
can vary depending on the terms of the land contract. The three most common
ways to handle the payments of taxes and insurance on the property are as
follows:
1. The Purchaser pays taxes and insurance.
2. The Seller pays taxes and insurance but then adds the
amounts paid back to the balance on the contract.
3. The Purchaser makes monthly contributions to an escrow
account held by the Seller and the Seller pays taxes and insurance out of
this account.
-
Method 1:
Purchaser pays the Taxes and Insurance
- Most often the Purchaser is responsible for paying the
taxes and insurance on the property. A typical clause in a land contract
where the Purchaser pays the taxes and insurance reads something like this:
- "The Purchaser agrees to pay all taxes and assessments
hereafter levied on said premises before any penalty for non-payment attaches
thereto and submit receipts to Seller upon request as evidence of payment
thereof; also at all times to keep the buildings now or hereafter on the
premises insured against loss and damage in a manner to an amount approved
by the Seller and to deliver the policies as issued by the Seller and to
deliver the policies as issued to the Seller with the premiums fully paid."
-
Method 2:
Seller Pays and Adds Amounts Spent
Back to Contract Balance
- Since failure to pay either the tax or the insurance
bills can seriously jeopardize the value of the property securing the land
contract (imagine trying to collect payments on an uninsured home that just
burned down!), some Sellers insist on paying the tax and insurance bills
themselves. After paying the bills, the Sellers just add the costs of insurance
and taxes back onto the balance of the land contract at the time that the
bills are paid. Contracts of this type are sometimes referred to as "Add
Backs".
- Under this option, the monthly payment will be supplemented
with an amount to cover approximately one-twelfth of the estimated taxes
and insurance. These larger payments (larger, that is, than they would be
if they covered principal and interest amounts only) are treated just as
if the entire amount of each payment was for principal and interest
- This makes the balance on the contract drop more quickly
than it normally would. However, when the tax and insurance bills come to
the Seller, the Seller pays them and adds the amounts spent to the balance
due on the land contract. Thus, the balance on the land contract, after
having been reduced each month more than it normally would be because of
the larger payments, is re-adjusted upward when the amounts for taxes and
insurance are added back to the contract balance.
- A typical clause in a contract where the Seller pays
the taxes and insurance and adds them back to the contract reads something
like this:
"The Purchaser is to pay monthly, in
addition to the monthly payment hereinbefore stipulated, the sum of $__________,
which is an estimate of the monthly cost of taxes, special assessments,
and insurance premiums for the land, which shall be credited by the Seller
on the unpaid principal balance owed on the contract. If Purchaser is not
in default under the terms of the contract, Seller shall pay for Purchaser's
account the taxes, special assessments and insurance premiums mentioned
above when due and before any penalty attaches, and submit receipts therefore
to Purchaser upon demand. The amounts so paid shall be added to the principal
balance of this contract."
-
Method 3:
Seller Pays Taxes and Insurance out
of Amounts Put in Escrow
- A third way to have taxes and insurance handled, similar
to Method 2, is for the Purchaser to pay approximately one-twelfth of the
estimated taxes and insurance along with each monthly payment. The Seller
then sets this extra part of the payment aside each month into what is called
an "escrow account" to pay the tax and insurance bills as they arise.
If the escrow account is ever too low to pay the bills, the Seller notifies
the Purchaser and a new, larger escrow payment is included along with the
next monthly payment.
- A typical clause in a contract where the Seller collects
an additional sum of money and deposits it into a separate account (called
an escrow account) reads something like this:
"The
Purchaser is to pay monthly, in addition to the monthly payment hereinbefore
stipulated, the sum of $__________, which is an estimate of the monthly
cost of the taxes, special assessments, and insurance premiums for the land,
which shall be deposited in a non-interest-bearing account
It is the Purchaser's duty to protect the value of the property
he or she is buying until it is paid in full. This clause is important because
the value of the property is what keeps the Purchaser making payments. If
the Purchaser ever defaults and suffers foreclosure, it is the value of the
property that should enable Seller to re-sell without a loss.
Most contracts require the Purchaser to notify the Seller
in writing before the Purchaser or any third party commits waste (neglects
the property or allows it to be used in a way that lessens its value) or removes,
changes or demolishes any buildings or improvements on the premises in a way
which may diminish the property's value.
After the Purchaser makes the final payment on the contract
without default, the Seller must convey the property by signing a Deed to
the property. At the time of delivery of the Deed,
the Seller often also delivers an abstract of title or a policy of title insurance
showing that the property is free and clear from any lien that the Seller
may have remaining on the property. Which person that will pay for the cost
of the insurance should be agreed upon when the terms of the purchase are
made. It is the Purchaser's responsibility to
record the Deed. The fee is nominal and recording the Deed will show as a
matter of public record that the Purchaser is the new owner of the property.
The Seller has the right to borrow against his or her remaining
equity in the property sold. In other words, if the Seller owned a $50,000
property free and clear and then sold it to the Purchaser who made a $10,000
down payment, the Seller initially has the right to collect $40,000 (his or
her remaining equity in the property) and he or she may borrow money by allowing
a lender to put a senior lien on the property (ahead of the Purchaser's interest
in the property) for up to $40,000. However, since the Seller must be in a
position at all times to convey the Deed to the property when the Purchaser
makes the final payment on the contract, the Seller can never owe someone
else more than he or she is owed by the Purchaser.
To protect the Purchaser from any debts that the Seller may
have against the property, the Seller must provide notice of any such mortgage
and its terms in a certified letter to the Purchaser. The Purchaser also has
the right to make the payments for the Seller on any debt for which the Seller
is in default. Any such payment made by the Purchaser, of course, will be
deducted from the monthly payment owed by the Purchaser to the Seller.
In short, the Seller must never owe on the property more
than he or she is owed.
A Seller almost always has the right to freely assign his
or her interest in the land contract. (An exception might be if the Seller
is still making payments on the property himself or herself and the contract
governing that purchase restricts the Seller's ability to assign.)
The Purchaser, however, often has the right to assign his
or her interest in the contract only after obtaining written permission from
the Seller. This protection for the Seller exists because the Seller may have
sold the property to the Purchaser on the strength of the Purchaser's character,
time on the job, or credit rating, among other things. When this Purchaser
then proposes that a new person begin to be primarily responsible for making
payments to the Seller, the Seller has the right to know and approve this
in writing. Such an assignment by the Purchaser
to a new purchaser usually does not release the original Purchaser from obligations
to perform under the contract if the new purchaser fails to live up to the
terms of the original land contract.
If the Purchaser fails to perform any significant part of
the contract, the Seller may have the right, after notifying the Purchaser
in writing of the exact nature of the default, to treat all payments already
made on the contract as mere rental payments made by the Purchaser. Some states
have very specific guidelines regarding default, so be sure to check with
your legal professional. If the default continues, the Seller has the right
to declare the remaining balance due and payable, and if the default is not
then cleared up or the contract is not paid in full, the Seller can begin
steps to regain possession of the property. Improvements made to the property
by the Purchaser then become the Seller's property.
Defaults by the Purchaser may include failure to make timely
payments, failure to properly maintain the property, failure to adequately
insure the property, or failure to pay taxes on the property as they become
due.
All contracts end with a series of miscellaneous provisions
regarding where payments and notices should be mailed, which state laws govern
the contract, and so forth. The provisions in a standard pre-printed land
contract are not nearly as important as any typed provisions at the end of
the contract. Read and enforce these typed provisions carefully.
To have a contract that can be recorded in the county records
where the property is located, be sure to have the contract notarized by a
licensed notary. The fee, if any, is usually nominal.
Also, have two witnesses available to observe the signing of
the contract. A land contract signed without witnesses
or a notary should be fixed with the help of a local attorney or title company.
This will enable the contract to be recorded for the safety and benefit of
all parties.
The HomeTeam, Jack Pearce and Al Leonard,
cannot write a land contract because we are not a licensed attorneys in
the state of Ohio. However, we are well versed on the "ins" and "outs"
of such contracts, and can help you decide whether this type of financing
is right for you, and if so, recommend several attorneys from which
to choose to answer all your legal questions and write a contract for you.
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