Land Contract vs. Lease Option (Rent to Own)

Okay, you are trying to sell your home, but the market is really soft right now. So you need to be creative.

You finally found a potential buyer. That person absolutely LOVES your home and wants to buy it, but they don’t have enough money to buy a home outright. Plus, this person’s credit isn’t good enough to qualify for a loan. They need time to repair their credit.

What can you do?

Two possible solutions are to sell your home to someone on a Land Contract or a Lease Option (also called rent to own). Either of these provide the buyer time to improve his or her credit enough to qualify for a loan to purchase the home from you outright.

Land Contract

Quick Explanation: The buyer buys the property and gets everything EXCEPT for the deed. The seller holds onto the property deed until the final payment is made. The buyer makes payments toward the purchase of the home, and the seller charges interest. Often, the land contract will have a balloon payment at the end of a period, anywhere from two (2) to ten (10) years, forcing the buyer to get a loan or lose the property.

Upside: As a seller, you no longer have to pay property taxes. The repair costs belong to the buyer, too. You get to collect a sizable upfront payment, usually around 10% of the purchase price. You receive monthly payments from this buyer. So you get upfront money and positive cash flow (hopefully).

Downside: The monthly payments you receive remove part of your equity, and each payment reduces the big prize at the end when the buyer finally pays you in full. Also, if things don’t work, you probably will have to refund the buyer’s equity, which can be a big chunk of cash if the person has lived there for a while. This equity can makes things a little dicey sometimes.

Lease Option

Quick Explanation: This provides the buyer the option to buy your home at a specific price, and he or she has a certain predetermined amount of time (usually between 2-5years) to exercise that purchase price. Meanwhile, this person pays you an upfront fee, albeit smaller than someone with a land contract. Also, this person pays you monthly, usually at above fair market rent value to help prepare this person for the upcoming mortgage. If your buyer does not buy your property before the lease option period expires, then you still have your property.

Upside: You get to collect an upfront fee, and you receive monthly payments. Each payment does not affect the outstanding balance. This person has paid for the right to buy your property; they have not bought your property, yet. You do not have to refund the buyer his or her option consideration money nor any monthly payments provided to you.

Downside: You have to pay for property taxes and major repairs. (Of course, you can get around this buy requiring the “renter/buyer” cover the first $500 for non-major repairs, and you get an insurance policy carrying a $500 deductible.) The upfront fee usually is smaller for a lease option than a land contract.

Benefits: Why Consider Either

The biggest benefits for a seller to consider either of these is that (a) it opens up the market since more people are in position to be able to buy your property, and (b) you can usually sell this at a higher price since this person has fewer choices. Plus, you should get paid for the inconvenience of not receiving all of your money immediately.