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The differences between a contract for deed and a lease option

| Nov 20, 2020 | Real Estate |

If you want to sell a property yourself without involving a real estate agent, listing your property for sale by owner is probably your plan. You may also want to consider offering owner financing on the property in order to attract a large and often-underserved section of the population in need of housing.

There are many ways for seller financing to work, but two of the more common forms of seller financing are contracts for deeds and lease options. Before you list your property, it makes sense to consider which one of these forms of owner financing will better suit your situation.

A lease option preserves your ownership interest

Instead of immediately selling a property to a potential buyer, you can lease or rent it to them first. If the contract you agree to sign includes a lease option, your tenant will be able to develop a history of timely payments while rebuilding their credit and then will have the option of buying the property when they are capable of doing so in the future.

It is common for a small amount of rent each month to go toward equity in the home or toward a down payment, depending on how you structure the contract. It is also common for landlords to require more substantial deposits for properties sold with lease options as payment for the right to make that purchase in the future.

Unfortunately, if the buyer gets cold feet after living in the property for a while, they may choose not to complete the sale, meaning you will have to begin the process over again with someone else. Lease options can lead to protracted real estate transactions.

A contract for deed is subject to many restrictions

A contract for deed is an instrument that some people call a land contract. They can be beneficial because they ensure that the buyer takes the property into their own name. The downside is that you may need to have special documents, like a deed in lieu of foreclosure, in order to protect yourself if the buyer defaults.

The seller has almost complete control over the terms set in such an agreement, allowing them to request interest rates that are substantially higher than what someone would pay with a standard mortgage. They might require a large down payment and pass off huge maintenance projects to potential buyers. In order to protect potential buyers, Texas does have restrictions on the terms a seller can set in a contract for deed.

Regardless of which instrument you decide to use in your sale, working with an attorney familiar with seller financing can help you draft contracts that optimize your protection.

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