58

I've been living at this place for about two months and my lease looks pretty typical. Nothing unusual. I've had no problems so far.

Today my landlord called me and explained something about the city wanting to charge him for a rental inspection that only covers the outside of the house, and so he's outraged that he has to pay for some guy to just look at the house from the sidewalk. He then explained that his plan is to present me with a "land agreement" and also a contract to invalidate the current lease so that I'm just paying him for the land agreement instead. I'm pretty confused about this whole thing and it doesn't seem right.

Through some quick googling, it sounds like I'd suddenly have to pay taxes on the property as if I owned it. Suddenly I would become responsible for paying the fee he's complaining about? Not to mention I don't know if any tenant rights apply anymore.

I'm deeply confused and would like to know if this is a thing many landlords try to do and whether there's anything I should start doing to cover myself if my landlord starts getting weirder.

Update: He says it could be a few months before he has the land contract for me to sign. I haven't agreed to anything and told him I'm going to check with a lawyer before taking any action.

Update 2: I'm not going to be signing anything and am going to be upfront about that rather than entertain the notion of having a lawyer look over the agreement. Thanks everyone!

BooleanCheese
  • 683
  • 1
  • 5
  • 9
  • 3
    Is the property being rented a house, an apartment, or what? – David Siegel Apr 08 '19 at 19:23
  • 2
    @DavidSiegel A rented house and I'm only two months into my year long lease. – BooleanCheese Apr 08 '19 at 19:27
  • 21
    Most of the time when a landlord offers you something that sounds out-of-the-ordinary for a reason that sounds spurious, it's a red flag. Also bear in mind that you have every right to say no - your tenancy is protected by the existing lease and he can't force a change on you that's outside the terms of that lease. – DaveMongoose Apr 09 '19 at 11:58
  • 11
    Checking with a lawyer is certainly the correct first step. – Carl Witthoft Apr 09 '19 at 13:15
  • 8
    @DaveMongoose Thanks. I'm disappointed that this means I probably won't be renewing my lease and will have to move again at the end of this one, but I do not feel comfortable with whatever he's trying to propose and will not be taking part. – BooleanCheese Apr 09 '19 at 13:18
  • 1
    GET THEE TO A LAWYER - GO!!! "Land contract" is a purchase agreement, not a rental agreement. I don't know what this guy has in mind, but this is very, very odd, and he's counting on you not knowing any better. Sign nothing, lawyer up, and be prepared to move. – Bob Jarvis - Слава Україні Apr 10 '19 at 01:44
  • 8
    @BobJarvis Until BooleanCheese actually has a contract (or anything written) to show a lawyer, this might all be nothing more than hot air from a new landlord. Running straight to a lawyer over a single conversation and spending $ or "burning up" a free consultation seems premature at best, maybe even paranoid, very expensive and unnecessary. Many cities/states/provinces have good government landlord-tenant departments that can help people for free (at least in Canada, but Ohio & USA... maybe?). – Xen2050 Apr 10 '19 at 08:40
  • Sometimes landlords win (when nothing big needs to be repaired, when tenants pay regularly and the market doesn't crash) sometimes they lose (a bit, as in your example). Tough luck! – Eric Duminil Apr 10 '19 at 12:04
  • 1
    I suggest that the landlord is having a tantrum over the inspection requirement and thinks this crazy scheme is a way to avoid the city fee, and he is not actually looking to sell the house. That doesn't mean you want a crazy landlord. Start by asking him why he doesn't just propose a regular sale of the property. – user6726 Apr 10 '19 at 17:26
  • 3
    The landlord will likely discover, in the process of trying to draft the land contract, that it is not a trivial task (for example, to specify the purchase price) as he does not ultimately want to sell or lose control. Therefore there's no reason for the OP to worry at all until the landlord produces a draft, with all the numbers and proposed provisions filled in. Currently it's the landlord who needs a lawyer (working mostly against the OP's interests), not the OP. The lease may expire sooner than there's any draft; optimize your attitude for that. – Jirka Hanika Apr 11 '19 at 10:04

3 Answers3

76

A "land contract" is not a way of renting property, it is a way of purchasing property on an installment basis without bank financing. It is Ohio's version of what in some other places is known as "contract for deed".

See "What is a Land Contract in Ohio" and "How Land Contracts Work" The actual law is Section 5313.

In a land contract, the buyer has equitable but not legal title. The buyer normally pays all taxes and fees, and is responsible for maintaining the property, just as if s/he has bought the property. But if the buyer defaults, all payments and equity would be forfeit to the seller. Until the buyer has paid 20% of the purchase price, or made 5 years of payments (whichever comes first) a single missed payment constitutes default and can lead to the buyer being evicted with all payments to date going to the seller, the buyer coming out of the deal with nothing.

Also, if the seller still has a mortgage and defaults, the buyer may lose everything paid to date. The buyer does not have the protections that a lease gives a tenant, nor the protections that legal title gives a purchaser via a traditional mortgage.

Land contracts are often used when the buyer cannot qualify for a mortgage.

The buyer pays interest, and it is often at a higher rate than the current rate on a mortgage.

Land contracts are often a form of predatory lending, but for some buyers they make sense. A buyer needs to carefully review the contract with a lawyer knowledgeable about land contracts, and consider the risks and benefits of this form of financing.

As I understand it, there cannot be a valid land contract for one apartment in an apartment building. A land contract must be for title to the land and all fixtures, including all buildings, on it. (There was at one point some unclarity if the question referred to an apartment. It is now clear that it refers to a house, so this statement is not relevant to the OP, but may be to others.)

It is not clear just what the OP's landlord (LL) has in mind. It may be that LL plans to offer a "land contract" in which the purchase would be completed only after a very long time, with the idea that the OP would simply default when s/he wanted to move. Such a default could harm the OP's credit. There seems no benefit to the OP in such a scheme compared to a lease, unless LL will lower the price significantly, taking into account maintenance costs and taxes, which OP may well be expected to pay under a land contract.

Note that a landlord can't legally force a tenant to sign a document cancelling a lease, or to sign whatever s/he will call a "land contract". Nor can s/he cancel the lease without the tenant's consent except for good cause as specified in the law (such as not paying rent). S/He could become uncooperative on other matters if a tenant doesn't do as s/he wants.

If a tenant does cancel his or her lease, s/he will lose some rights. Others are guaranteed by law as long as the tenant is paying rent. If one signs a "land contract", what happens depends on its provisions.

OP needs to very carefully consider just what is being offered, and its risks and any possible benefits. Details of the contract will matter.

No matter exactly what LL has in mind, this is not at all a usual procedure for a landlord. OP or anyone in a similar circumstance should be very careful.

Malady
  • 175
  • 1
  • 8
David Siegel
  • 113,558
  • 10
  • 204
  • 404
  • The tags say rental property. It does not seem as though the owner is intending "land contract" to have the meaning it normally does. – Putvi Apr 08 '19 at 19:28
  • 9
    The tags are what OP thinks applies, and it is a rental now. LL may well be trying to distort or misuse a "land contract", we can't really tell without seeing the proposed contract. LL may have a crazy idea that won't work, but it may harm OP in the process, if OP goes along. – David Siegel Apr 08 '19 at 19:32
  • 3
    @Putvi You are correct in that I am not planning on buying the property and had never even heard the term before today.

    I do not plan on signing the land contract and I have given no cause for my landlord to terminate the current lease, but this is probably enough concern for me to find elsewhere to move when this lease is up.

    I have not been offered any form of compensation to sign the land contract and my landlord thinks that I'll voluntarily agree to terminate the lease and sign the land contract for the sake of helping him screw the city. This is all based on a single phonecall.

     – BooleanCheese Apr 08 '19 at 19:34
  • @BooleanCheese yeah, I figured he just wanted a way to cheat the city. I would just let him mess with it and go on with life if I were you. – Putvi Apr 08 '19 at 19:35
  • @Putvi My primary concern is that this would involve forfeiting my rights as a tenant and would free him of his responsibility as a landlord. I'd become responsible for repairs and whatnot. – BooleanCheese Apr 08 '19 at 19:37
  • If he really does it right yes, but if his purpose in it is to avoid inspection fees, I took it as he thinks he can use the term "land contract" and still treat you as a renter to get around inspection laws. – Putvi Apr 08 '19 at 19:39
  • 8
    @BooleanCheese the landlord cna't legally force you to sign a document cancelling your lease, or to sign whatever he will call a "land contract". Nor can he cancel the lease without your consent except for good cause as specified in the law (such as not paying rent). He could become uncooperative on other matters if you don't do as he wants. If you do cancel your lease, you lose some rights. Others are guaranteed by law as long as you are paying rent. If you sign a "land contract" what happens depends on its provisions. – David Siegel Apr 08 '19 at 19:47
  • 27
    It may be worth mentioning that if the OP signs this contract with the knowledge of the LL intending to defraud the municipality, that the OP would be guilty of participating in the fraud. There is no reason that the OP should sign this contract unless they have actual intention to participate in the land contract for a valid reason. – Ron Beyer Apr 08 '19 at 20:17
  • 1
    "As I understand it, there cannot be a valid land contract for one apartment in an apartment building. A land contract must be for title to the land and all fixtures, including all buildings, on it." The OP mentions they are renting a house. – Azor Ahai -him- Apr 08 '19 at 20:39
  • @Azor Ahai When I wrote that, OP, had not yet mentioned that the property was a house, and the other answer was assuming an apartment. Indeed I asked OP about house vs apartment. look at the timestamps of comments and edits, please. – David Siegel Apr 08 '19 at 20:43
  • The question (posted four hours ago) mentions the house. Your answer was posted an hour ago. – Azor Ahai -him- Apr 08 '19 at 20:52
  • @Azor Ahai The word "house" was in the original question, you are correct there. Perhaps i was confused by the mention of an apartment in Putvi's answer. In any case, I was not clear until the explicit comment by OP. I have now edited my answer to add clarity on this point. Does it look ok to you now? – David Siegel Apr 08 '19 at 21:12
  • No problem - I missed the comments under the question trying to figure out for myself what the case was. – Azor Ahai -him- Apr 08 '19 at 21:15
  • "a single 3missed payment" -- A single missed payment, or 3 missed payments? – Harper - Reinstate Monica Apr 08 '19 at 23:18
  • @Harper one payment as stated in the linked document. "3" was a typo. Fixed now. – David Siegel Apr 09 '19 at 00:58
  • @Mazura comment moved into the answer – David Siegel Apr 09 '19 at 00:58
  • 1
    IANAL, but the "deal" that the OP describes sounds like shenanigans to me. It seems to me that the chance of there being an illegality is not to be dismissed lightly. – EvilSnack Apr 09 '19 at 03:28
  • 3
    If LL chooses to actually sell the house, and OP chooses to accept the propped contract and buy, there is nothing illegal, and future inspections are probably not required. If LL wants to screw the city but not really sell, it may be legal, depending on the way the contract is worded, if OP consents. OP is quite likely in a bad spot in either case, but by his own act, if he consents. – David Siegel Apr 09 '19 at 07:57
24

This is buying a house. If that's not what you mean to do, watch out! Even so, watch out.

Honestly, if it hadn't occurred to you until now to buy a house, this isn't for you. If this has piqued your interest in buying a house, explore doing it the normal way with bank mortgage, realtor, all that.

Land contracts are often thought of as "exploitive", and this very thing here is why. They are often offered to lifetime rental tenants who are totally inexperienced at house-buying, and don't know a good or bad deal when they see one. They have no reference for comparison. As such, they get suckered.

So I'd like you to actually house-hunt the normal way, so you can develop a reference. So you know what normal home sell prices are, what interest rates you qualify for, etc.

  • It's true. Lots of towns punish landlords because they don't want rental properties junking up their fine town. These harassment fees, such as this inspection or higher property tax rates, go away -- hence your landlord's interest.
  • Land contracts often don't have down payments, mortgages almost always do for most people in the market for a land contract
  • It moves the property tax burden to you. The amount of this property tax is public record. Signing a land contract may increase the property's paper value, which increases its property tax.
  • It moves maintenance to you.
  • You must maintain so the lender (former landlord) doesn't lose value in his collateral.
  • But you can do your own work; only pros can work on rental properties.
  • If you manage your finances well, it builds home equity for you.
  • However, the equity belongs to the seller until you successfully finish the land contract.
  • The usual way to finish the land contract is, refinance with a regular bank mortagage - with mortgages, the equity belongs to you.
  • The paper "purchase price" on the land contract may seem unimportant. It's a huge deal. It is the purchase price you are agreeing to pay. A bad deal makes it impossible to finish the land contract by converting it to a real mortgage. Make sure it is market competitive!
  • If your lease goes month-to-month, the landlord can evict you for any or no reason* on a month's notice. Not on a land contract! You'd have to miss a payment (one is enough) or do something blatant like not maintain the place.

Land contracts are very often offered by landlords to tenants who don't have the financial skill to manage the asset. This ends up playing out just like a rental for the landlord, except the tenant paid the property tax and maintenance too, so worse for the tenant.

One way land contracts can work in your favor is if the market causes the property to appreciate in value. That creates equity. That belongs to you if you can finish the land contract.

* except certain illegal reasons, and except in rent-control areas.

David Siegel
  • 113,558
  • 10
  • 204
  • 404
Harper - Reinstate Monica
  • 19,563
  • 2
  • 27
  • 81
  • 2
    There are some problems with this answer. many land contracts do include a down payment, although others do not. "They cannot evict you like they could in an at-will rental" The owner cannot evict for no reason, but any missed payment or other breech of the agreement can lead to eviction >the rest of this answer looks good to me..OP wrote in a comment "I am not planning on buying the property" – David Siegel Apr 09 '19 at 01:18
  • @DavidSiegel Thanks. Fixed. – Harper - Reinstate Monica Apr 09 '19 at 01:52
  • 3
    Yeah I made about 6 passes at how to say that compactly, and the 30-day thing got dropped by accident. Thanks for the edit. – Harper - Reinstate Monica Apr 09 '19 at 01:59
  • @Harper Thank you. I will not be signing any land contract, and the whole situation just seems incredibly suspect to me. – BooleanCheese Apr 09 '19 at 13:19
-7

Tax wise, you don't have to pay taxes on someone else's property. The same goes for the inspection. He has to be inspected because he is renting to someone else, you aren't.

He isn't selling you land, if you are paying him for the apartment, you are still a renter, so no matter what he calls it, the building must be inspected, because someone lives there.

Putvi
  • 3,974
  • 10
  • 22
  • 1
    But what's the advantage for him if he makes it a land contract? – BooleanCheese Apr 08 '19 at 17:03
  • There isn't one. People have tried crazy things to get out of paying fees and such since the beginning of time. – Putvi Apr 08 '19 at 17:04
  • Land contract is supposed to mean that he takes no interest in it while you pay for it buy the month, but if he is using it to rent to you as in he would own it, he gets no benefits. Hes just trying to change the wording to cheat the city and not live up to what it really should mean. – Putvi Apr 08 '19 at 17:09
  • 11
    This answer appears to misunderstand what a land contract is in Ohio, and make assertions which are not or may not be true. See my answer. – David Siegel Apr 08 '19 at 19:21
  • What he is describing isn't a land contract so my answer fits his situation. – Putvi Apr 08 '19 at 19:22
  • 10
    OP doesn't really know what LL is offering, because OP hasn't seen the contract yet. If it purports to be a land contract, and fulfills the legal minimum under Sec 5313, it is a land contract, and OP may be on the hook for taxes and repairs. If the offered contract does not comply with 5313, it is hard to say what effect it will have, but OP will have given up any lease, it seems. OP might then be renting month-to-month. But who knows? – David Siegel Apr 08 '19 at 19:28
  • You can't force someone into buying a house though, so the traditional land conract meaning wouldn't make sense. – Putvi Apr 08 '19 at 21:30
  • 1
    LL can't force OP into signing anything at all. He apparently assumes that OP will comply with his wishes, or perhaps intends to offer some not-yet-stated financial incentive. I suspect that he intends to offer something that will technically be a valid land contract, but that wouldn't be paid off for a long time, say 99 years, with the intent that OP simply default when OP wants to move. But that is only a guess. He may not fully know himself what he will offer, and his lawyer, if he consults one, may discourage the idea. – David Siegel Apr 08 '19 at 21:54
  • Could be, but it just seems like too crazy of a way to go about it to be that. – Putvi Apr 08 '19 at 21:56
  • 1
    @Putvi "can't force.." but you can trick someone into signing a contract – Aethenosity Apr 11 '19 at 02:16