by Vena Jones-Cox
I really don’t understand the difference between a lease/option and a land contract. Why would I want to offer a seller one as opposed to the other? -A.S, Atlanta
I can understand your confusion: on the surface, a lease with option to buy and a land contract (or contract for deed, agreement for deed, bond for deed, or land installment contract, as they are called in various parts of the country) look very similar.
There’s an up-front payment, a monthly payment, and an agreed-upon price that is often due in one large, future payment. Furthermore, are commonly used to circumvent the due-on-sale clause and to control properties for the purpose of “sandwiching”.
However, lease/options and land contracts have very different legal, tax, and control ramifications.
A lease with option to buy is an agreement between a seller and a tenant.
The only rights that the seller conveys are the rights to occupy the property (a right which can be assigned to another person through a sublease, unless the contract forbids it), the right to enjoy the property unharassed, and the right to buy at some set price in the future.
These rights continue until the end of the lease term or as long as the rent payments are being made.
If the tenant defaults, the seller can regain possession of the property through the relatively quick and simple eviction process. In a well written lease/option agreement, an eviction also terminates the tenant’s right to buy the property.
A land contract, on the other hand, is an installment contract between a seller and a buyer. Once the contract is executed, the buyer gets an entire bundle of rights called equitable title, and takes on all of the legal responsibility to maintain the property, pay the real estate taxes, and so on.
(Yes, the tenant in a lease/option can be made to agree to maintain their home as part of the option agreement, but, since they are really in a tenant-landlord relationship, cannot be held responsible under the law if they don’t).
If a buyer (“vendee”) in a land contract defaults, the seller’s only remedy in most states is to foreclose, a lengthy, complicated, and expensive process. In short, a vendee in a land contract had much more legal and practical control over a property than a tenant in a lease/option.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by clicking here. One per household, please.