By Lee R. Schroeder Contributing Columnist
July 20, 2014
The financial crisis of the last several years has affected the creditworthiness of many of us. Those of us who have faced significant financial difficulty in the past may now have sufficient income and cash flow to make house payments.
At the same time, other people are ready to sell their homes. This sounds like matches made in heaven, except when a prospective buyer cannot secure home loan financing, due to past financial difficulties.
Our region is blessed with a large number of incredibly flexible, community-based lenders. However, the federal government’s newest rules and regulations tie the hands of our banks, credit unions and other lenders. Many loans that lenders might have tried to accommodate in the past are no longer workable due to those federal rules and regulations. The solution for some sellers and buyers has been to seek a land contract.
Land contracts are a specific form of seller financing. A land contract is an arrangement where the seller allows the buyer to make payments toward the purchase of a house over time, while the buyer acquires immediate possession of the house. Sellers in a land contract are called “vendors,” and buyers in a land contract are called “vendees.”
Land contracts that involve residences (houses) are strictly regulated in Ohio.
For residential land contracts, the vendor may keep a mortgage on the house after signing the land contract, but the outstanding amount owed on that mortgage at any specific time cannot exceed the balance owed by the vendee to the vendor at that time.
It is important to remember that a vendor who has a mortgage on the vendor’s property might trigger the mortgage being due in its entirety if the vendor enters into a land contract. Therefore, any vendor who will not pay off the vendor’s mortgage before the land contract begins should seek preapproval from the mortgage holder (lender) before signing the land contract.
Further, if a vendee defaults (fails to make a payment or commits another violation of the land contract), the vendee may not automatically forfeit all of the payments already made. If a vendee has paid more than 20 percent of the purchase price or has made payments for more than five years and defaults, the vendee must be foreclosed upon as if the vendee had a traditional mortgage.
Land contracts should be recorded in their entireties at the local Courthouse. The house and the land under the house must be described in the land contract by a licensed surveyor’s “metes and bounds” description or reference to a recorded plat at the local Courthouse.
While payments are being made under a land contract, at least annually, the vendor must provide the vendee with a report detailing allocation of the payments made and the current balance due in the land contract.
There are numerous other, very specific requirements for land contracts that are detailed in Ohio law. Those technical and lengthy requirements for land contracts make land contracts documents for which an attorney’s knowledge and experience is invaluable.
Lee R. Schroeder is an Ohio licensed attorney with Schroeder, Blankemeyer and Schroeder LLP in Ottawa. He limits his practice to business, real estate,estate planning and agriculture issues in northwest Ohio. He can be reached at firstname.lastname@example.org or at 419-523-5658. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.