Land Contract vs. Lease with Option to Purchase: Which is better for the Buyer?
Last month we took the perspective of the seller to discuss the pros and cons of a land contract versus lease with option to purchase. When everything goes according to plan, land contracts can be a win-win for both the seller and the buyer. But if the buyer stops making payments, a lease with option to purchase is often a better option for the seller.
What about the buyer? If it is better for the seller when the buyer stops payments to have entered into a lease with option to purchase, does that mean a land contract is better for the buyer? Not necessarily.
The advantages of a land contract to the buyer are that it provides an ownership interest in the real estate, which helps to quickly build equity in the property and good credit history. A major disadvantage is that the buyer is almost always responsible for structural and mechanical repairs to the house. If the buyer needs to enter into a land contract because traditional bank financing is not available, the buyer may not have the financial means to pay for unexpected expenses like a new furnace or roof.
In a real estate market with rising housing prices, a lease with option to purchase can provide a number of advantages to the buyer. For example, if the buyer’s option price is locked in for two years at $100,000, the house may have appreciated to $110,000 or more when the buyer exercises their option at the end of the term. But during that two-year period the buyer was likely not responsible for major repairs to the house, and if circumstances change, would have an easier time negotiating a lease termination rather than a land contract foreclosure.
At the end of the day, deciding whether a land contract or lease with option to purchase is the better option comes down to the motivation of the buyer and seller. If the buyer intends the house to be a long term commitment and is having trouble obtaining traditional bank financing for a reason such as lack of work history due to self-employment, a land contract can be a great thing. But if the seller views the house as a rental investment and the buyer is looking for a short term commitment with only a possibility of making the house permanent, a lease with option to purchase is likely the better option.
If you are thinking about purchasing property directly from a seller instead of a bank, I am available to discuss your specific situation and determine the best available option.