The Difference Between a Land Contract and a Lease Option

Land contracts and lease options do have something important in common. Both are powerful ways of taking control of a property without taking out a mortgage. No mortgage qualifying. No high mortgage fees. And there are other advantages to not using a mortgage such as being able to close the deal fast because only you and the property owner are involved.

Those are the major similarities that investors wanting to control more properties should know. But what is more important is the critical difference between a land contract and a lease option.

The Difference Between a Land Contract and a Lease Option for Both Investors and Buyers

I’m going to talk primarily about what this means to investors but there are also implications for buyers. As an investor, if you already own the property out right selling on a land contract might make sense.

First of all, the phrase “land contract” can sound like we are only talking about raw land. A land contract is also called a “contract for deed.” Although it can be for raw land, I’m referring to single-family houses. Your average home that the average American lives in.

A land contract is a type of seller financing, although the seller gets out of the deal immediately for the most part. There are variations to land contracts but essentially the buyer takes over making the previous owner’s mortgage payments. The buyer doesn’t take out a new mortgage. They simply take over making payments on the existing mortgage. One of the major variables with a land contract is often a one-time profit paid to the seller. If there is a $120,000 mortgage on the house and the buyer agrees to pay $140,000 for the house, the buyer pays the seller $20,000 (lump sum or installments). Then, the buyer simply takes over making the monthly installment payments on the existing mortgage.

As an investor, you want to control property without owning it whenever possible. In other words, you want to make a profit but minimize your risk.

The Big Advantage of a Lease Option

The big problem for an investor who sells on a land contract is that significant risk continues until that old mortgage is paid off. The buyer has equity (ownership) but the seller’s name and signature are still on the existing mortgage. If the payments aren’t made, the mortgage company comes after the seller because they still have a legally binding contract. There are also possible risky legal issues in the U. S. Congressional Dodd-Frank Act.

Not so with lease options and sandwich lease options. There are huge advantages for investors using a lease option.

As an investor, if you already own the home, a plain lease option makes a lot more sense both financially and to remove risk. First, it drastically increases your market size of potential buyers. Instead of collecting a huge down payment ($20,000 in the land contract example above), you can require a much smaller “option fee” that applies towards the down payment when the option to purchase in completed.

The buyer pool is larger because more people can afford a smaller option fee (maybe $7,500) compared to a big $20,000 down payment. And your risk is much lower because you are still the legal owner until the purchase is complete (in a simple lease option).

The full truth is the difference between a land contract and a lease option is tremendous!

The Even Bigger Advantage of the Sandwich Lease Option

Investors can buy on a land contract but the sandwich lease option is much better. Buying on a land contract makes you (the investor) the legal owner of the property. As the owner, if something goes wrong, you have all of the legal risk. If the roof falls in or the HVAC conks out, you’re on the hook to replace it.

With a sandwich lease option, you control the property but you don’t own it. You become the middleman (meat in the sandwich) between the seller and the lease option buyer. Without owning the property or taking full responsibility, you control the property and the deal. You create three profit streams for yourself while minimizing your risk.

You initiate separate lease options with the owner and the buyer. Profit point #1: you pay a smaller option fee to the owner than you collect from the buyer. Profit point #2: you pay less rent to the owner during the option period than you collect from the buyer. Profit point #3: the sales price you pay to the owner is less than the sales price you collect from the buyer.

All at reduced risk by controlling the property without owning the property!

The difference between a land contract and a lease option is enormous. You are primarily responsible for creating and managing the agreements. A big part of this responsibility is helping both the owner and seller understand how this creative financing works. Most real estate owners and buyers are only familiar with one type of financing – taking out a new mortgage. Creative financing is very common with investors but not so much with traditional owners and buyers. As the savvy investor, you understand the tremendous difference between a land contract and a lease option and explain how everyone benefits from a sandwich lease option.

I’m here to help you find owners for sandwich lease options. Or, if you are considering selling your property directly to a buyer through a land contract or lease option, I am available to discuss your specific situation to help you determine the best available strategy.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Options System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

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Sandwich Lease Option Forms and Contracts Explained

Lease option forms and contracts are used when tenant(s) are renting or want to rent a property before committing to purchasing the property. The contracts give the tenant an exclusive option to purchase the property but the tenant does not fully commit to the purchase. Hence, the word “option.”

A key concept here is that the option becomes an “exclusive” right to buy the property. The exclusivity in the lease option forms and contracts stops the person controlling the property from offering it for sale to another buyer.

The person controlling the property could be the owner. However, with the sandwich lease option it’s an investor controlling the property (you) without owning it. The investor is the meat in the middle of the sandwich controlling how two sets of paperwork are written. That is how you control the property as an investor without owning the property.

What Goes Into the 1st Set of Sandwich Lease Option Forms and Contracts

The first set of sandwich lease option forms and contracts is between the investor and the homeowner. It is very similar to the second set except key dates and dollars are different. These dates and dollars are the foundation for building the three profit points an investor makes with a sandwich lease option.

The three profit points in a sandwich lease option are:

  1. A higher option fee from the end buyer.
  2. Collecting a higher rent from the end buyer than paid to the owner.
  3. Selling to the end buyer for more than you purchase from the owner.

Keep these profit points in mind as the 1st set of lease option forms and contracts are written. You will sign a lease option with the owner. Negotiating a lower option fee with the owner than what the end buyer pays to you is your first profit. A profit that comes early in the transaction. The rent you pay the owner must be less than what you charge the end buyer to create your second profit that continues until the end buyer completes the purchase. Of course, you want to sell to the end buyer for more than you pay the owner. This is your third and last profit point and also your largest profit of the three. Clearly, you need to have all three of these dollar numbers in mind when signing lease option forms and contracts with the owner.

An important date you need in the 1st set of papers is the date your purchase option with the owner expires. For you to have full control of the sandwich lease option, this expiration date must come after the expiration date you have with the end buyer.

What Goes Into the 2nd Set of Sandwich Lease Option Forms and Contracts

For the most part, the same important dollar numbers and dates go into the lease option forms and contracts you sign with the end buyer. What’s important is the dollar numbers are higher to establish your three profit points. That means the 2nd set of paperwork has a higher option fee, a higher rent, and a higher purchase price.

It’s also important that your lease option time be shorter with the end buyer than the owner. This is a safety precaution preventing the end buyer and owner from completing the sale themselves, which you worked to put together. Otherwise, the end buyer might wait for your option with the owner to expire while the buyer still has an option to purchase. You could probably argue this legally but getting the dates correct keeps everything above board and simple.

Maintenance and Repair Responsibilities Also Belong in Lease Option Forms and Contracts

Other important clauses in the tenant/end buyer lease option forms and contracts include who is responsible for maintenance and repairs. This usually also includes dollar values for major repairs. This is important to the relationship you have with the owner as well as the end buyer. The reason the owner is entering into a sandwich lease option is because you are solving his/her landlord headaches. However, the end buyer will soon be the new owner and it makes sense for him/her to begin taking on ownership responsibilities. Investing their time and money into maintenance and repairs is also a motivator for the end buyer to complete the purchase option. Additionally, it’s well established that most end buyers in a lease option take better care of the property they will soon own.

However, because the end buyer doesn’t yet actually own the property, there should be dollar limits to how much repairs cost him/her. Major expenses like a new roof or shoring up a sagging foundation should still be the responsibility of the current owner. Otherwise, the end buyer will not complete the option to purchase.

Lease option forms and contracts are not complicated but they are different from more traditional real estate purchase agreements. I’d be glad to help you work through them the first couple of times. Once you walk away with the three separate profits made from a sandwich lease option, you’ll fully understand exactly how lease option forms and contracts make you a successful real estate investor.

By Wendy Patton

For more than 35 years, I’ve used the Sandwich Lease Options System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate and find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

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