The answer lies in your own personal needs. Both are suitable means of helping a buyer into your property, but each has advantages depending upon your goals. Lets explore the structure of each, then your choice will be clear.
A rent with option provides the buyer with a standard rental lease and provides all the protections to both parties accordingly. If the tenant misses a payment, the landlord can evict them and they will lose 100% of their non-refundable option money. The tenant is merely purchasing the option to buy the property at a future date under specified terms and conditions. The landlord also retains all of his or her rights under the lease AND they retain all of the responsibilities of a landlord; maintenance, taxes, insurance and collections all remain with the landlord. Usually part of the this agreement includes applying a portion of the rent toward a downpayment. From a banking perspective it is important to note that the rent MUST be fair market rent PLUS the additional option payment. If not, the lender will not allow any portion of the rent to be applied to the down payment, which defeats the purpose of using this tool.
A Landcontract is actually a sale of the property. The buyer and seller agree to the terms of the sale, which usually include a down payment and specific terms of repayment. The only difference is that the Deed is not filed in the County Clerks office, it is held in escrow until the final payment is made on the property by the buyer. For example if Steve were buying Sally’s property he might offer $5,000 down with the remaining $195,000 to paid back on a 30 year amortized note at 5% with a three year balloon. In this scenario the BUYER is 100% responsible for maintenance, taxes and insurance, and the deed is transferred upon the payment of the balloon due in three years.
A land contract provides the buyer with ownership and relieves the seller of responsibility for the property. If the buyer defaults, the seller can evict them without going through the lengthy foreclosure process so the seller remains protected.
If you are buyer and are considering one of these options it is important for you to know that if the SELLER’s financial condition is shakey then it can impact this transaction adversly. If the seller gets a judgement against them it attaches to the real estate that you are in contract to purchase since the deed is not filed. To protect yourself in this scenario you would use a wrap around mortgage and file the deed.
To learn more call Tim Halladay at Victory Funding at 518-899-7700. We’re in business to help you attain your real estate dreams!
