09 Dec Question and Answer: Rent-to-Own Vs. Land Contract
Recently, a friend of mine and frequent blog reader asked me a real estate question about a house he’s interested in. I love taking people’s questions, but also want to share that information with all of you! So here is Estevan’s question:
“My landlord wants to sell the duplex I’m living in and doesn’t want to do a “rent to own:)” because for him it’d be the same as collecting rent, so then we thought of doing a “lease to own” but our landlord would like more info on how they’re different from each other and unfortunately we aren’t exactly sure either. Also, How would it benefit him short term?”
So how are rent-to-own and lease-to-own different? Well, they’re not. They are basically the same thing. The way it works is that the lease has an option (guaranteed to purchase) and you exercise the option–normally exercised at the end of 12 months, 24 months, etc. You make lease payments until you exercise your option to purchase. Then you get a new loan and literally take owner out of the situation.
Now I wouldn’t recommend this route, but rather a Contract for Deed or a Land Contract. (These are the same thing.) This is where the owner sells the building to you directly under whatever terms you and the owner agree to. Depending on state law (I’m pretty sure it’s called a land contract in Michigan where Estevan lives) it might be called either a Land Contract or Contract for Deed. Either way they are the same thing. I would recommend purchasing the home on a Land Contract.
This means that the owner is selling the house to you on the terms you and he agreed to. You may put some money down and then he would finance the house for you. The secret sauce here is that your name gets recorded on the deed. You would have to determine and agree to your terms:
- The Price.
- The Amortization Schedule.
- The Interest Rate.
So you, Estevan, would cover taxes, insurance on the property. Now this does benefit the landlord short term for a couple of reasons.
- He could charge a little more than a rent payment (sorry!).
- He’s no longer responsible for taxes and insurance.
- He’s no longer responsible for repairs to the building.
And that’s all there is to it! There is no difference between lease or rent to own, and I recommend this direct track to owning through a Land Contract instead! I hope this was helpful, Estevan and others interested in this issue! It can be confusing because of state law sometimes, because things will carry two different titles in different places. But stay sharp, gang.
Please feel free to always leave questions in the comment section below! If there’s interest, I will make Q&A on topics of entrepreneurialism, finance and real estate, a regular part of the blog schedule!
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Thanks for reading! I’ll be back next week to tackle Christmas Survival, Entrepreneur Characteristics, and the Real Estate Cycle. And please subscribe!