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What terms protect you as a buyer considering a land contract?

On Behalf of | Feb 11, 2021 | Real Estate |

Paying toward the purchase of a house is often a better use of your income than just paying rent. A land contract can be a great solution for someone who wants to buy a home but can’t qualify for a traditional mortgage or doesn’t want one right now.

Most Ohio land contracts will require a downpayment in order to qualify for seller financing for the purchase. The contract you sign primarily protects the seller from defaults and other risks in the transaction. Still, you may be able to negotiate terms that also help protect you.

Ask for a later balloon payment or longer terms

The one catch to some land contracts that potential buyers accidentally overlook is the contractual obligation to pay off the balance of the land contract at a specified time. While not all land contracts have these balloon payment clauses, quite a few do.

Many will require that you pay off the balance of the property’s sale price within three, five or 10 years. By the time you reach the end of that period, you will need to have outside financing or enough resources to pay off the balance of the contract yourself.

A balloon payment means you have to aggressively work to fix your credit or ensure that your circumstances will allow you to refinance the property. If you can’t qualify for a mortgage when the balloon payment comes due, you could lose all the equity you build up in the property.

Ask to get rid of the prepayment penalty

The opposite of the balloon payment on a land contract is arguably the prepayment penalty. Some sellers will include a clause that forces you to pay a set sum or a percentage of the balance of the land contract if you pay off the balance of the contract before the end of the contract term.

Sellers include these terms so that they can maximize the interest income made on such transactions. They limit your options as a buyer because the end of your contract may not perfectly line up with the best time for you to refinance.

Consider negotiating any inspection clauses

Given that the seller must assume a risk by handing over occupancy before they receive the full value of the property, they may reserve the right to frequently check the property’s condition to ensure that you have not caused damage or failed to make necessary maintenance and repairs.

Asking for the same privacy rights as most renters have, such as 24-hour notice before an inspection, can give you more privacy while still upholding the seller’s right to make sure the property remains in good condition.

There may be other ways to negotiate your land contract in your favor. Getting help with understanding the terms of the contract and pushing for more protection can help you when buying a home via land contract.