Seek Professional Help
By law, we may not offer legal advice or prepare the final documents. However, we do not recommend that you attempt to write the contract yourself. We suggest that you have a legal professional or Title Company prepare them for you. We stand ready to guide you through these transactions in concert with competent legal professionals.
The Purchase Price
The purchase price is negotiated between Seller (Vendor) and the Purchaser (Vendee), but there are some objective standards that can be used as the basis for negotiation.
- One method is to have a CMA or Comparable Market Analysis done by a RE/MAX Valley professional. Comparables are properties that are comparable to the subject property and can be used to determine its market value. This analysis will usually give the Seller a good idea of what the property should sell for. RE/MAX Valley offers this service free in the hope for the right to list the property, but you may choose to list with another agent without obligation
- A second method is to hire an independent certified appraiser to do a complete appraisal of the property, which would include (as above) at least three comparables. This method is more expensive (from $150 to $300 or more). Although more authoritative a thorough CMA done by a competent real estate professional will yield similar results.
- The down payment is usually at least 10% of the selling price. However, a larger down payment means the Purchaser has more equity and owes less, both of which make the contract more secure.
- A good thing to remember is that the larger the down payment, the more a land contract is worth should you decide to sell the land contract to another investor or investment company.
- The length of time the contract has been in existence also will affect the sellable value of that contract.
- Most companies that purchase land contracts prefer older (seasoned) contracts. They show that the Purchaser is a safe risk.
- The interest rate on a land contract should be at least equivalent to interest rates currently charged on mortgages by banks and savings and loan associations; preferably 1% higher.
- There are legal maximums in Ohio on land contracts between individuals. See your legal professional for details.
- A formula of 1% per month on the unpaid balance at the time of sale is a good general rule. Here's an example:
- $25,000 selling price of property
- $5,000 20% down payment
- $20,000 balance due
- $200 monthly payment (1% of balance due); add to this one-twelfth of the estimated taxes and insurance.
- On smaller land contracts (under $15,000), a monthly payment greater than 1% of the balance due is generally required.
- To determine how long a contract will run given a certain interest rate and payment amount, just call a title company and they can look it up for you. There are also many good sites on the Internet that will run an amortization. This service is usually free. Assuming an interest rate of 9% in the above example, the land contract would run for 186 months (15.5 years).
Taxes and Insurance
Lending institutions generally require the buyer to pay one-twelfth of the estimated yearly real estate taxes per month and one-twelfth of the estimated insurance costs in addition to the monthly payment. At the end of the year, they have the money on hand to pay the taxes and insurance. This is also the wisest thing to do when selling on a land contract. Since the land contract will run over a period of time, there is always the chance that property taxes will be raised, so be sure to include a clause in the land contract that provides for increasing the payment when this happens.
- If a Seller currently owe on a piece of property, they do not necessarily have to pay off the present land contract or mortgage. Instead, they can usually continue to make monthly payments in the required amount just as before the new land contract sale. (The original obligation is often referred to as "underlying debt" since it "underlies"- is superior to and existed before- the debt owed on the more recent sale of the same property.)
- Sellers should check the land contract or mortgage they are making payments on, however, to see if there is a so-called "Due on Sale" clause requiring them to pay off the debt if they resell the property.
- Finally, a Seller should require the land contract payment being received to be at least 25% greater than the payment they will continue to make to the original Seller.
How long a land contract is scheduled to run is referred to as the contract's amortization. A contract's amortization depends on the size of the contract, the size of the monthly payment, and the interest rate being charged. (The higher the interest rate and/or the smaller the monthly payment, the longer the straight amortization will be. This is why a balloon payment is sometimes considered. Contracts with a 10- to 20-year amortization are common and are preferred to contracts with a 30-year amortization. Balloons usually are set for 5 or 10 years from the date the contract begins.
The Purchaser's Credit-worthiness
Just like any lender, the Seller has every right to information that shows the Purchaser has an adequate source of income to pay the land contract obligation. They can request references, find out where the Purchaser works and his or her annual income, and obtain a credit report showing how promptly he or she is paying current debts. If selling to a person with less than a commendable credit record, many Sellers increase the down payment and periodic payment requirements.
Memorandum of Land Contract
- Many times the Purchaser or Seller does not want to put on public record all of the details of the financial transaction. In these cases a Memorandum of Land Contract can be drafted, signed by all parties, witnessed and notarized.
- By recording this Memorandum both parties have put the public on notice that some agreement does exist regarding the sale of a particular property. This Memorandum filing is also cheaper than recording a land contract since Memorandums are typically only one page.
Selling All or Part of Your Land Contract for Cash
There are many ways of getting cash from a land contract. A Seller can sell the whole contract now or, if they just need $2,000 to $5,000 for some short term goal, they can sell just a few payments now and collect monthly payments again in the future. Many of these plans can even give up to 95% or even 100% of what is due on the contract.
Why Would I Want to Sell My Land Contract?
When you convert part or your entire land contract into cash, you gain several advantages in addition to immediate cash:
- You receive a substantial sum of cash right now - enough to accomplish some major goals
- You don't have to worry about collecting monthly payments or servicing you contract.
- You don't have to worry about whether the taxes and insurance premiums are being paid each year to protect your investment.
- You don't have to worry about whether your Purchaser will continue to make his or her payments
Your RE/MAX Valley Real Estate Professional buy law, cannot write a land contract because he/she is not a licensed attorney in the state of Ohio. However, they 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 write a contract for you or seek advise about land contract law.