What is a Rent to Own Land Contract?
Rent-to-own land contracts are essentially agreements to buy a property without the actual exchange of money until later in the contract, all while maintaining possession. Much like a rent to own agreement between a landlord and tenant, rent-to-own land contracts allow individuals to lease the property from the owner until they decide – or are obligated – to purchase it. Rent-to-own contracts are an alternative financing method for purchasing property, and they are most common in the state of Ohio.
The basic premise is that the seller is willing to finance the purchase of the property, and will allow the buyer to do so gradually over time. As part of the lease agreement, the seller may require that the buyer make monthly rent payments , either in addition to a down payment, or as the primary component of payment if the buyer is unable to pay significantly upfront.
Provided the buyer complies with the terms of the contract, he or she will have the right to purchase the property at the conclusion of the lease. While the contract should detail the specifics, an example would be that the buyer may purchase the property at a set value within the first six months of the lease, and that value would rise incrementally each month thereafter.
While anyone may create and enter into a rent-to-own contract with a buyer for real estate in Ohio, it is useful to bear in mind a few key points to ensure that the process goes smoothly:
Rent-to-Own Law in Ohio
Among the most important parts of Ohio’s legal system concerning rent-to-own arrangements are a statute that provides an easier, faster way to terminate a rent-to-own land contract and an administrative action in which the Ohio Attorney General brings a civil lawsuit to protect Ohio families from certain unfair, deceptive, and unconscionable practices in consumer transactions-including selling real property through a rent-to-own land contract.
The Ohio law that makes it easier and faster for a seller of real property to foreclose on a land contract is Ohio Revised Code section 5313.01, which effects a "forfeiture" of the land contract (as opposed to a regular foreclosure). This section allows the holder of a mortgage or a land contract to bring an action to declare the forfeiture of the land contract, and, if successful, entitles the plaintiff to possession of the property by speedy process.
Furthermore, the law provides that any writing purporting to be a transfer or assignment of a land contract requires delivery to the transferee, as well as notice to the maker of the land contract. The law further states that "[a]ny provision of [a] contract to the contrary shall be void and unenforceable."
Therefore, a purchaser who attempts to purchase a property under a "rent-to-own" land contract while the seller has previously transferred the land contract to another party must pay the rental amount to the person who had acquired the land contract by delivery and notice as described above. Failure to do so results in a reversion of rights to the assignee and the forfeiture of the land contract.
Ohio Revised Code section 1345.01 through 1345.26 addresses Ohio’s "Consumer Sales Practices Act" (CSPA), which is designed to address unfair, deceptive and unconscionable acts or practices when selling consumer goods and services to consumers. The CSPA applies to sellers attempting to sell property (such as property sold under a rent-to-own land contract) when the buyer is a "consumer" and the seller is a "supplier." The seller is a supplier if it is engaged in the business of making sales (including land contract sales), and the buyer is a consumer if he, she, or it is a "person who engages in the purchase of consumer goods or services for personal, family, or household purposes."
The CSPA defines several unfair, deceptive, and unconscionable acts or practices, and the CSPA effects an award of damages to an aggrieved consumer who files suit alleging an unfair, deceptive, or unconscionable act or practice as defined by Section 1345.02 of the Revised Code.
A private right of action exists for either a violation of a specific provision of the CSPA found in Section 1345.02 of the Revised Code or for a general violation of the act — a violation of general unfair, deceptive, and unconscionable acts. Alternatively, if the Ohio Attorney General or the relevant county prosecutor brings a suit then the statute explicitly provides for the payment of attorney fees and costs to the prevailing consumer regardless of whether the suit was brought by the consumer, the county prosecutor, or the Ohio Attorney General.
Unlike most other states, Ohio does not have a statutory or administrative scheme specifically aimed at regulating rent-to-own land contracts. However, the repayment terms of a land contract between a consumer and the seller are subject to Ohio’s mortgage lending statutes, and Ohio case law holds the seller of the land contract to the statutory limits on interest rates.
Tenants who are considering entering into a rent-to-own land contract should contact a qualified Ohio Real Estate attorney.
The Pros and Cons of Rent to Own Land Contracts
The Advantages and Disadvantages of Rent-to-Own Contracts to Purchasers and Sellers
As with any agreement, both sides will need to protect themselves, and we advise that you review any land installment contract with an attorney.
Advantages to Purchasers
Purchasers can find that they can afford the purchase of a home without the need of a hefty down payment. Many purchasers do not have the funds available to put 10% down on a $200,000 purchase.
Purchasers can make home improvements while also making their mortgage payments, which build equity. If the property stays in good condition, it makes it easier to sell if needed, and if they want to refinance, they are much more likely to qualify for a loan when the time comes if the mortgage is current.
If a default occurs, the seller cannot evict a purchaser as quickly as they can a tenant. They may end up having to follow the judicial foreclosure process which takes a bit longer.
Advantages to Sellers
Sellers can potentially earn a higher interest rate over the term of the contract which makes them more appealing to buyers with low credit scores.
There is also a slight tax advantage to sellers in that a portion of the monthly payments of the contract can be considered taxable income.
Disadvantages to Purchasers
As detailed above, if your agreement is treated as a lease, then it can be terminated with very little notice. If your contract is treated as a land installment contract, you may have to follow the lengthy judicial foreclosure process to attempt to regain possession.
Disadvantages to Seller
If your agreement is treated as a lease, the difference between your monthly payments and your overall property taxes and insurance will be treated as income and taxed as such.
Steps to Getting Into a Rent-to-Own Land Contract
The initial step in the process is to run the title. The purpose of the title search is to identify any potential problems with the property that could affect the owner’s ability to sell or pass a clear title to the purchaser. The seller’s representative will run a title search and obtain a title insurance policy. When running the title, a property may be found to have mortgages and judgments on it. As a result, a land contract cannot be completed until those mortgages and judgments are either paid off, or the seller obtains a subordination agreement from the bank allowing for the contract to be recorded after the subordination agreement is recorded.
The next step is negotiating the terms of the land contract. The agreement typically will include the purchase price, down payment, monthly rent, lease duration, sale of the property, or the right to prepay. The main reason for entering into a land contract is having a property without having to go through the process of obtaining a mortgage. Based on the terms of the agreement, it is also possible to avoid the additional cost of purchasing insurance on a mortgage through the process.
Once the terms are agreed upon , the next step is drafting the contract. The Ohio Revised Code does not have specific language for a land contract, and therefore the parties include specific terms and provisions as they relate to the particular circumstances. Once the land contract is drafted, each party will sign the agreement and have it notarized. It is common for a deposit to be paid at the beginning of the process. An important consideration is how the purchase price is structured. Is the purchase price certain, or linked to an appraisal value as of the date of the contract? How the purchase price is structured will affect both the deed transfer and mortgage:
The parties should keep in mind that they are free to negotiate specific terms to the extent permitted by law. It may become necessary to create a Quit Claim Deed transferring the property from the seller to themselves, followed by a new down payment for the buyer. Following this, a new title search should be performed, and a new title insurance policy obtained. The original land contract and assignments should be recorded with the county recorder and any court judgments obtained.
Common Mistakes and How to Avoid Them
While rent-to-own land contracts can be a pathway to ownership of premier agricultural land in Ohio, they can also carry a major downside for the uninitiated. Many contracts include an "hourglass" payoff structure, which means that after an initial period of paying rent, the buyer has to pay the remainder of the sale price within a specified time. This puts the buyer on the splitter’s hook, without knowing how long the hourglass is. You may know that you are buying the property for a good price right now, but what will the market yield at the end of the hourglass? Only time will tell. During times of rapid appreciation, especially, the market could fall.
And what if the rental payments come due and you don’t have the cash to make the payment? It’s important to give your lender the chance to step in.
One contract may not be as forgiving as another. But having an experienced real estate lawyer on your team can make all the difference. Your attorney can draft a better contract or even negotiate terms with the other party that create a better deal for you.
Another way an attorney can help is by ensuring that you can access your property during your contract. An issue that arises from time to time is when the buyer installs buildings or improvements on the property before securing title. The property will be posted as lienable, due to the unpaid sales price.
You may also lose the right to access your property by failing to secure your estate of the deceased predecessor, given that you have no title. Your landlord may have died halfway through your agreement. You know the person who has paid taxes on the land only died because he was 90 years old, and he said he had it in a living trust, but the county auditor does not have a record of it. Or perhaps your landlord is alive but simply refuses to give you title. In either case, time is of the essence. You need to get to the recorder’s office and record a notice of buyer’s interest (not legally required but preferred) so that you can access the land you have been paying to occupy, or negotiate an interest in the real estate with the estate administrator and give it to the estate, even if it’s by quitclaim deed.
Issuing the notice of buyer’s interest provides you with notice of your rights to access. It also informs the world at large of your rights – in other words, it’s a notice to anyone who would host a lien on the real estate that you have that right to access.
The steps mentioned above are not legally required, but they are best practices that can save you from an unexpected outcome.
Where to Find Rent-to-Own Land in Ohio
Rent-to-own land opportunities in Ohio can be found in a variety of places, but knowing where to look can sometimes prove difficult. One of the most logical places to start is with your local real estate listings. Rent-to-own land listings can be found in both the homes and the vacant land categories, depending on whether a home sits on the land being offered or not. If you’re near a city, checking the MLS may turn up some leads on commercial rent-to-own properties.
Another option in your search for Ohio rent-to-own land is to enlist the help of a local real estate agent. Agents have access to information not always available to the public, and by explaining exactly what you’re looking for in a property, they’ll be able to guide you in the right direction . An agent can also help connect you with a rent-to-own land contract lawyer in Ohio who can help get your deal started.
Last but not least, you can also search online for sites that specialize in rent-to-own land deals. By returning results from all over the state, these sites can save you time on your search. A rent-to-own land contract lawyer can also help provide the locations of sites that specialize in doing everything from listing properties to connecting you with sellers.
To get the best sense of how your rent-to-own land opportunity will work, it’s a good idea to spend some time with a rent-to-own contract lawyer in Ohio. This will not only help you understand your rights and obligations under the contract, but it guarantees you’ll avoid any common pitfalls.
