The Difference Between a Land Contract and a Lease Option

a Lease Option

As most readers already know, I favor lease options but land contracts are an alterative way to sell real estate for a high profit. There is a difference between a land contract and a lease option but there are also similarities. What is most common between the two is these can both be used as relatively short term ways to sell a property.

Contracts Define the Difference Between a Land Contract and a Lease Option

The major difference between a land contract and a lease option is the buyer’s ability to build equity in the property. Real estate contracts can be written in almost any way that a seller and buyer agree to. There are state laws that need to be adhered to but many options exist for the contract.

What is similar between the two contracts is that both typically involve a balloon payment within two and four years. With a land contract, the buyer is building equity during those years. With a lease option, the tenant has an exclusive right to buy the property during the contract period but doesn’t usually build equity. With a land contract, the property title isn’t transferred until the purchase is completed (typically the buyer eventually takes out a mortgage). If things don’t go according to plan, the land contract becomes more complicated because the buyer has equity in the property. A lease option is simpler because if things don’t go according to plan, the contract expires and both parties walk away.

In both cases, it’s usually necessary for the buyer to improve his or her credit rating. For that reason, the seller (investor) needs to anticipate that things might not go as planned. The biggest difference between a land contract and lease option is how easy it is to get a failed tenant out of the home. With a land contract, you’ll be dealing with the equity issue that will vary from state to state. A lease option doesn’t involve equity and is much easier to resolve.

Pros and Cons When It Comes to the Difference Between a Land Contract and a Lease Option

A big difference between a land contract and a lease option is what either the buyer or the seller is wanting. A land contract is a form of owner financing that can be very tempting to a buyer that doesn’t see an ability to obtain financing anytime soon. But depending on the amortization length, the seller won’t see most of the money for years to come. Most sellers will prefer a lease option because the full purchase price needs to be paid with a mortgage somewhere between 18 to 36 months depending how the contract is written.

The difference between a land contract and a lease option makes these contracts very different from a standard purchase agreement. As long as you follow the legal requirements in your state, these are still fully enforceable contracts. However, because they vary from the standard, it can take some work for an investor to find a seller that understands the difference between a land contract and a lease option.

I’m here to help you find sellers willing to enter into these types of contracts. 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 and help you determine the best available option.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option 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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