Land Contract or Lease with Option to Purchase? Does it Really Matter?

By : Jacob Davis, Esq.

Our office is routinely tasked with providing legal counsel on a variety of real estate matters. One common area of confusion is whether a client needs a land contract, a lease agreement with an option to purchase, or a seller-financing mortgage agreement. This article will focus on land contracts and lease option agreements.

What is a land contract?

First, let’s start by defining what a land contract is under Ohio law. A land contract is generally a way to buy and sell real estate without the involvement of a traditional lender (i.e. a bank or credit union). The general premise of a land contract is that the seller finances the purchase price, and the buyer makes monthly installment payments to the seller. Under Ohio law, a “Land Installment Contract” means an:

executory agreement which by its terms is not required to be fully performed by . . . the parties to the agreement within one year of the date of the agreement and under which the [seller] agrees to convey title in real property located in this state to the [buyer] and the [buyer] agrees to pay the purchase price in installment payments, while the [seller] retains title to the property as security for the [buyer’s] obligation. Option contracts for the purchase of real property are not land installment contracts. Ohio Rev. Code § 5313.01.

There are major differences between a land contract and a traditional mortgage agreement, including: (1) with a land contract, title to the property remains with the seller until the loan is paid is full; (2) with a traditional mortgage, title to the property is transferred to the buyer and the lender takes a security interest in the property.  So why would anyone prefer a land contract?

The answer is simple: some individuals may not qualify for traditional lending, or the buyer may not want to jump through all the hoops of a traditional bank or lender to obtain financing. The benefits of a land contract are that it opens up new credit avenues for buyers and investors to purchase property; however, buyers must realize that title to the property does not automatically transfer until all payments have been made to the seller.

Why do I need to hire an attorney for a land contract?

Our office often gets brought in late when a land contract issue has already arisen because of do it yourself (DIY) templates. The requirements for a land installment contract are rigid and found in Ohio Revised Code §§ 5313.01 – 5313.10.  There are minimum requirements for a land installment contract to be valid which include but are not limited to: executing the contract in duplicates, having the names, addresses, legal description of the property, contract price, down payment amount, interest rates, and provisions regarding recording and what happens if the buyer defaults under the terms of the contract. See Ohio Rev. Code § 5313.02.

 In sum, it takes a real estate attorney knowledgeable in this area to ensure your agreement complies with all the statutory requirements. Additionally, sellers may want to know that if the purchaser defaults under a land contract in Ohio, a formal foreclosure process may be required if the buyer has paid for five years or paid a total sum of twenty (20%) percent of the purchase price. Therefore, it is vital for sellers, investors and agents to have general counsel who can help them (1) craft a land installment contract; and (2) navigate the foreclosure or eviction process if the buyer defaults.  For buyers, it is important to retain counsel to ensure that the land contract complies with the minimum requirements of the Land Installment Contract Statute under the Ohio Revised Code.

How does a lease agreement with an option to purchase differ from a land contract?

A lease option agreement, or otherwise known as a rent-to-own agreement, is generally a real estate document that combines a residential lease with a purchase agreement, giving tenants the prospect of buying the property at a designated period during or after the rental term.  The structures of a land contract and a lease option agreement are similar, but they differ in certain respects. 

First, a lease option agreement is generally a traditional landlord-tenant relationship with a future option to purchase.  This differs from a land contract where the parties have already determined the buyer is in fact purchasing the property.  Tenants who breach their contract under a lease option agreement may try to argue that their agreement is in fact a land contract so that they can take advantage of the payment for five years or 20% protections which require a foreclosure process rather than an evictions process.  Therefore, it is critically important to seek counsel prior to entering into either of these transactions. 

Courts will often consider a number of factors when determining whether your agreement is a land contract or a lease option agreement, including:

  • whether the agreement complies with the land contract statute found at Ohio Rev. Code § 5313.02;

  • the title of the document;

  • whether the agreement is recorded (land contracts must be recorded with the county);

  • the responsibilities of the party during the agreement (i.e. who is responsible for taxes, maintenance, repairs, services, improvements, etc.); and

  • whether there is an option to purchase at a later date (lease purchase option).

For all these reasons, it is important to be prepared and hire a qualified attorney to guide you through the transactional process. You may click here to schedule a consultation with Nalls Davis.