Home Buying: Land Contract Versus Lease-to-Purchase

Home Buying: Land Contract Versus Lease-to-Purchase

By on Oct 1, 2016 in Real Estate | 0 comments

With today’s volatile housing market and increased financing requirements, homeowners and interested buyers often seek alternatives to the traditional mortgage-financed transfer of property. The two primary options are lease to own and land contracts. Each has benefits and drawbacks for the purchasers and sellers but can result in a successful home-buying experience.

Lease to Own

Also known as “rent to own,” this option involves a landlord who leases the home to a renter who has the option to purchase the home by a specified date. When the deadline is reached, the renter is required to finance the purchase price or forfeit the lease. This process requires a sound legal document that includes:

  • A statement that this is a lease-to-own relationship.
  • An acknowledgement that the landlord will maintain the property and pay property taxes during the course of the lease.
  • The designation of a specified amount of the rent to be allocated toward the down payment on the property.
  • The prohibition of the owner/landlord taking out an additional mortgage or other home-equity financing on the property during the lease.
  • A statement that the renters enter into the agreement in good faith and will make every effort to complete the purchase of the home within the specified time period.
  • The purchase price of the home.

The advantages of this arrangement for the purchaser are that they can live in the home they want to buy while they meet the financing requirements. And the seller has both a tenant and a buyer, often without the added costs of a Realtor.

The risks of lease-to-own arrangements include:

  • The renters cannot afford to purchase the home as agreed by the deadline
  • Property values significantly change during the course of the lease
  • Interest rates rise during the course of the lease
  • Other circumstances disqualify the renters from obtaining financing

Despite these risks, lease to own is often a successful process for both parties.

Land Contract

With a Land Contract, the current owner essentially operates as a bank, and the buyer makes payments toward the purchase price over a period of time, typically over a few years. The purchaser does not receive the deed to the property until the loan to the seller is paid in full, either through payments or refinancing.

Advantages of a land contract for the buyer are that it often requires a lower down payment; it’s cheaper to refinance the property than it is to obtain an original mortgage, and he or she can write off the interest on taxes. For the seller, this option has the advantage of attracting numerous buyers who want to avoid real estate sales commissions. On the other hand, a land contract may be riskier for sellers because it is harder to foreclose on the property than it is to evict a tenant.

Both lease to own and land contracts require a contract prepared by an experienced real estate attorney who understands these complicated transactions. Hronek Law LLC represents both buyers and sellers involved in these kinds of property transfer agreements. We prepare the necessary documents and enlist a reputable title company to perform the necessary title review, to protect the interest of our clients and assure a positive home-buying or selling experience. Visit our website, or contact us today to learn more.

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