Hi. I’m David Soble, and I am a real estate and finance attorney here in Michigan.
Today’s question comes 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? At this time, 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 a lot of equity in the property and they are looking for a specific rate of return on the financing. The parties agree to purchase terms such as how long the buyer will have to pay off the purchase price based on a monthly payment and a rate. The land contract is similar to 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?
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 is done with all their payments, the seller is obligated to convey the deed over to the buyer. Usually, the deed will be held at a title company during the existence of the land contract.
In a rent-to-own agreement, it’s a bit different. First, another name for rent-to-own is known as a lease option. When it comes to buying under a rent-to-own arrangement, a portion of the rental payment will be applied to an agreed-upon purchase price in the future. Basically, the parties are agreeing that the tenant can buy the property in the future for a specific price and a part of each monthly rental payment will be applied to the purchase price. The amount applied to the purchase price, however, is usually not significant. For instance, a tenant might agree to purchase a home for $100,000 in the future. The lease payment for the property might be a thousand a month. Of the $1,000 maybe $50 or $100 will be applied towards the purchase price.
A tenant in a rent-to-own program is legally just leasing a property, whereas a purchaser of a land contract has actual legal ownership rights in their property. The land contract buyer has what we call an equitable interest and they can go and get a mortgage when they need to pay off a land contract. They can refinance the land contract and have access to the equity in the property. This isn’t so in a rent-to-own situation. The tenant has 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.
Courts, however, will 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 in the lease and is keeping track of their payments, then courts will accord them greater rights in the property than treating them merely as a tenant who is only leasing.
Under a lease with the option to purchase access to the bank, financing is more difficult because unless otherwise agreed between landlord and tenant, lenders do not give credit for 100% rental payment towards a purchase price and landlords rarely want the monthly rental payments applied towards rent — not towards building up any equity. What that means is if you’re paying $1,000 a month in the rental payment, you’re rarely building up any equity, whereas in a land contract situation, 100% of your payment will be applied towards the purchase price.
Whether you are considering a land contract or rent to own, remember that any agreements or transactions that concern real estate and last for over one year must be in writing to be enforceable.
These agreements concern large amounts of money and so they 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 provenresource.com.
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