This question is from Greg in Livonia, who says,
“I’m considering purchasing a home with my fiance. The seller is offering a rent-to-own program. Is there a difference between a rent-to-own program and a land contract? Now, we don’t qualify for a traditional mortgage, but we are working on that with our loan officer.”
A land contract is a purchase arrangement where the seller of a home provides the financing for the mortgage, called “seller financing.” They act as your lender. Usually they have built up equity in the property and are looking for a specific rate of return on the financing. Parties agree to sale terms such as how long the buyer will have to pay off the sale price based on a monthly payment and a rate. The land contract is like a mortgage in that it will contain terms that regulate the obligations of each party. Ie. Who pays property taxes? Who is responsible for maintenance, etc?
Who Holds the Deed?
In a land contract arrangement, the seller continues to hold title to the property, so they still hold the deed while the purchaser makes the agreed-upon installment payments for the designated time. When he or she finishes all their payments, the seller must convey the deed over to the buyer. Usually, a title company holds the deed during the existence of the land contract.
A rent-to-own agreement is a bit different. First, another name for rent-to-own is a lease option. Regarding buying under a rent-to-own arrangement, part of the rental payment is applied to an agreed-upon future purchase price. Parties agree the tenant can buy the property in the future for a specific price and a part of each monthly rental payment is applied to the purchase price. The amount applied to the purchase price is usually not significant. For instance, a tenant might agree to buy a home for $100,000 in the future. Lease payments for the property might be a thousand a month. Of the $1,000, only $50 or $100 may be applied towards the purchase price.
A tenant in a rent-to-own program is leasing a property, whereas a purchaser of a land contract has actual legal ownership rights. A land contract buyer has an equitable interest and can get a mortgage when they need to pay off the land contract. They can refinance the land contract and have access to equity in the property. This isn’t so in a rent-to-own situation. Tenants have no ownership rights in the property. In fact, the tenant could lose all the money that’s been designated towards the purchase price if they fail to meet their lease obligations.
How Courts View Agreements
Courts treat a land contract owner and tenant with a rent-to-own agreement in a similar manner, even though a tenant in a rent-to-own agreement has fewer rights than the buyer on a land contract. If the tenant is meeting their obligations under the lease, and keeping track of their payments, courts will accord them greater rights in the property than treating them as a tenant who is only leasing.
Lease Financing and Equity
Under a lease with the option to purchase, access to bank financing is more difficult. Unless otherwise agreed between landlord and tenant, lenders do not give credit for 100% rental payments towards a purchase price, and landlords rarely want the monthly rental payments applied towards rent — not towards building up equity. That means if you’re paying $1,000 a month in the rental payment, you’re rarely building up equity, whereas in a land contract situation,100% of your payment will be applied towards the purchase price.
When considering a land contract or rent-to-own, remember that any agreements or transactions concerning real estate and lasting for over one year must be in writing to be enforceable. These agreements concern large amounts of money and should be drafted or reviewed by qualified attorneys to protect against any major problems in the future.
If you need any further information, please feel free to contact me, David Sobel at provenresource.com.
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