Both Land and Lease-to-Own agreements are seller-financing options that give a buyer the chance to own a home when typical lender financing is hard to obtain. Both agreement types come with their own pros and cons. Let’s break down the differences.

In a Land contract, a buyer is agreeing to purchase a home at a predetermined price and makes monthly payments to the seller, often with a down payment. Once the amount is paid in full, the seller delivers the deed to the buyer. In a Lease-to-Own agreement, the buyer rents the home from the seller with the option (not obligation) to buy at a predetermined price at the end of the contract period. In both cases, some or all of the buyer’s monthly payments (and any money paid upfront) are figured into the purchase price to help the buyer establish equity in the property.

Pros of Land Contracts

∙ In a Land Contract, the deed of the property stays in the seller’s name until the sale closes.
∙ The seller can collect more than one month’s payment as security.
∙ The seller can make the deposit non-refundable.
∙ The seller can require the buyer to fully maintain the property.
∙ The Land Contract is recorded so that both sides are protected and neither side can say the agreement didn’t exist.
∙ The buyer can move into the property without having to qualify for a bank loan.
∙ Buyer monthly payments go toward owning the home.
∙ Usually the buyer can work on the property as if it were his own.
∙ The buyer can put utilities in her name.

Cons of Land Contracts

∙ The seller relinquishes possession of the property without a finalized sale.
∙ If the seller fails to make his own loan payments, the property could go into foreclosure.
∙ If the seller dies prior to the close of sale, his heirs will have to file a probate case to complete the sale.
∙ A buyer might not be able to perform the duties of the contract, meaning the seller has to possibly evict the buyer and start over again in finding another buyer. Worst case scenario, if the buyer had over 20% of the property paid or has paid for over five years, the seller may need to foreclose.
∙ The seller’s lender, if alerted to the existence of the land contract, can issue the note due (the balance of the mortgage).
∙ There may be liens against the property that the buyer is not aware of.

The Pros of Lease-to-Own Contracts

∙ The seller is still the owner and receives a monthly amount from the buyer that may go toward the purchase of her home.
∙ The seller collects a large option fee for entering into such a contract, which she keeps even if the buyer backs out.
∙ If home values are falling, sellers can lock in a higher price at the start of the agreement.
∙ The seller does not have to market the home in search of a buyer and coordinate showings with the tenant.
∙ Renters who want to own generally treat their living space better.
∙ The buyer can move into the home immediately, possibly at its current market value.
∙ Such a contract gives a buyer time to improve credit so that he can get a loan for the home.
∙ A portion of the buyer’s monthly rent goes toward the purchase price of the home, should he opt to buy.

Cons of Lease-to-Own Contracts

∙ The seller is still a landlord and must maintain the property.
∙ If the renter opts not to buy, the seller must find another buyer.
∙ If the seller finds another buyer willing to pay a higher price, he cannot do so since he must abide by the agreement he’s signed with the renter/buyer.
∙ The renter/buyer could be forced to leave if the seller gets foreclosed on.
∙ If the renter opts not to buy, they lose the large option fee they paid to the seller.
∙ The renter/buyer might not be able to improve credit enough to qualify for a loan, thereby losing the opportunity to purchase by terms of the contract.
∙ If the terms of the agreement weren’t carefully negotiated, the buyer could end up with home repairs costs they must cover themselves.

Sellers and potential buyers should understand the terms of the agreement thoroughly in both types of contracts. Sellers should check out the buyer carefully and protect themselves by requiring a sufficient down payment. Buyers should obtain copies of the seller’s loan statements and property tax bills, showing payment status.

Platinum Service Realty