For real estate transactions in the state of Ohio, a number of legal issues and tax matters should first be considered when using a Land Contract or a Seller-Financed Mortgage Contract.
OHIO LAND CONTRACT CONSIDERATIONS
Under Ohio law, a Buyer and Seller cannot enter into a Land Contract for vacant land. The Land Contract must be for a home and the real property on which the home sits. A Land Contract can be made for a mobile home ONLY if the mobile home is physically affixed to the land and be made part of the real property by the County auditor.
A Seller cannot sell property by Land Contract if the Seller owes more on a mortgage on that property than the balance due under the Land Contract. (Exception: a mortgage that covers more property than just the real property being sold on Land Contract to the Buyer is acceptable, provided the Seller has made prior written disclosure to the Buyer of the amount of the total mortgage).
A Seller cannot put a mortgage on property being sold by Land Contract during the Land Contract in an amount GREATER than the balance due on the contract without the consent of the Buyer.
Every Seller must give the Buyer a statement showing the amount paid in principal, amount paid in interest, and the remaining balance owed at least once year or upon the Buyer’s demand (but no more than twice a year).
The Seller must RECORD the Land Contract in the County Recorder’s Office where the property is located within 20 days of signing, and it shall contain the legal description of the property. If the Seller does not record it, the Buyer should record it to protect the Buyer’s interest.
If the Buyer fails to make a payment or fail to comply with other terms of the Land, the Seller must provide the Buyer with written notice of default. The notice must provide 30 days to cure the default under the Land Contract. This notice should be served upon the Buyer by handing a written copy to the Buyer, by leaving it at the property which is the subject of the Land Contract, or by mailing it to the Buyer by registered or certified mail to the Buyer’s last known address.
If before that 30 day period has expired the Buyer has come current on all payment obligations and otherwise comes into compliance with the terms of the Land Contract, and pays any fees and charges which Buyer owes under the Land Contract, then Buyer has cured the default and will not lose the property.
However, if at the end of the 30-day period the Buyer remains behind in payments, fees or charges owed under the Land Contract, or is not complying with all other terms, then Seller must give the Buyer a WRITTEN NOTICE terminating the Land Contract. The notice must include:
1. An indication that there is a Land Contract and the address of the property;
2. The reason(s) for ending the contract; and
3. A statement that the Buyer has ten days to correct the problem.
This notice must be served upon the Buyer by handing a written copy to the Buyer, by leaving it at the property which is the subject of the Land Contract, or by mailing it to the Buyer by registered or certified mail to the Buyer’s last known address.
After the ten (10) day notice period, the Seller can file court action if the Buyer has not corrected the default and complied with the contract. There Seller can take one of two actions, depending on the status of the Land Contract:
1. If the contract has been in effect for less than five (5) years, or less than 20% of the principal amount due under the Land Contract has been paid, and Buyer has been in default for over thirty (30) days, the Seller can commence an action of ‘forfeiture’ against the Buyer. This action is similar to a landlord evicting a tenant. The forfeiture will, if successful, cancel the Land Contract and restore possession of the property to the Seller. The Buyer will lose any down payment made under the contract and each monthly payment made will be considered a rental payment.
If the Seller elects a forfeiture action and desires to terminate the land installment contract, such election is the EXCLUSIVE remedy which bars further action on the Land Contract unless the Buyer has paid an amount less than the fair rental value plus deterioration or destruction of the property occasioned by the Buyer’s use. In such case the Seller may recover the difference between the amount paid by the Buyer on the contract and the fair rental value of the property plus an amount for the deterioration or destruction of the property occasioned by the Buyer’s use.
2. If the Buyer has paid on the Land Contract for five (5) years or more from the date of the first payment, or has paid a total sum equal to or more than 20% of the contract price, the Seller may recover possession of the property only by use of a FORECLOSURE action and judicial sale of the property. A foreclosure action must be filed in a Common Pleas Court where the property is located; and the requirements for such action are dictated by statute and by court rules. A foreclosure action is a much more complicated and time consuming legal process, often taking months to complete.
OHIO SELLER-FINANCED MORTGAGE CONTRACT CONSIDERATIONS
To secure the balance of the purchase price to be paid by the Buyer on a sale where the deed is tendered to Buyer and recorded at the outset of the transaction, the Seller will file a mortgage in the amount owed by the Buyer. The mortgage will be for the balance of the purchase of the property, usually with interest at a rate agreed upon by the parties.
The mortgage must contain the legal description of the property.
The mortgage must indicate the amount that is owed by the Buyer to the Seller.
The mortgage must be signed by the Buyer and properly notarized.
The mortgage must be filed in the Recorder’s Office in the county where the property is located.
A filing fee will be required to be paid at the time the mortgage is filed (usually based on the number of pages that are used in the mortgage document).
Also read the following articles for more items of consideration:
Overview of a Seller-Financed Mortgage Contract Real Estate Sale
Pros & Cons for a Buyer in a Seller-Financed Mortgage Contract
Pros & Cons for a Seller in a Seller-Financed Mortgage Contract
IMPORTANT POINT OF CONSIDERATION: In Ohio, a Land Contract offers a benefit to the Seller that does not exist in a Seller-Financed Mortgage Contract. That benefit: the Seller retains ownership of the property until the entire purchase price is paid. In many cases, should the Buyer default in making the agreed upon payments, the Seller can simply evict the non-paying Buyer without the need to engage in a protracted and potentially costly foreclosure litigation (although this fact may not be true in all cases as described above). Having the ability to quickly regain possession of the property upon default is a significant factor which favors the Seller working under a Land Contract format vs. a Seller-Financed Mortgage Contract. But the Seller should carefully consider the pros and cons of each type of contractual format and understand the detailed outlined above before making such a decision.