Is Owner Finance synonymous with Lease Option?

Question

Is owner finance/ seller finance synonymous with lease option? The two seem similar to me

Lease option - allows the tenant the option to purchase the home

Owner finance- owner is the bank, sells home to the buyer

Jon Holdman · Answer

A lease/option is one form of owner financing, but hardly the only one.

From strongest for the buyer/weakest for the seller to weakest for the buyer/strongest for the seller.

1) Seller owns a free and clear house.  Sells and provides a loan to the buyer.  Title transfers to the buyer.  Seller is the lender and nothing else.  If buyer stops paying, seller must foreclose.  Zero risk of any loans being called since there are none.

2) Seller owns a property with outstanding mortgages.  Sells and provides a loan to buyer.  Title transfers to buyer.  The new mortgage "wraps" the old one.  Buyer pays payments on the new mortgage to the seller, who continues to make payments on the old mortgage.  Seller must foreclose if buyer stops paying.  Violates due on sale clause in old mortgage.

3) Seller owns a property with outstanding mortgages.  Sells and buyer takes responsibility for existing mortgages.  Title transfers to buyer.  May involves some payment to seller, but this is typically small if anything.  Also know as "subject to", since the sale is "subject to existing loans".  Seller is essentially out of the picture, but is still on the hook for the mortgage and is relying on the  buyer to make payments.  If the buyer stops paying, the lender will foreclose and this will reflect on the seller's credit.  Seller's only recourse against buyer is to sue.  Violate due on sale.

4) Land contract (aka contract for deed) on a free and clear property.  This is like a car loan.  Title stays with seller, but there is a legally binding (and sometimes recorded) contract to transfer title when the contract is fulfilled.  If the buyer stops paying, the seller must kick them out by a procedure that varies from state to state.  Some states treat this like a foreclosure, others like an eviction.

5) Land contract on a property with a loan.  Similar to above, but the seller must continue paying on the existing loan.  Violates due on sale.

6) Lease/option.  Two separate agreements between buyer and seller.  A lease, which gives possession and an option, which gives the right to purchase.   Sometimes the option provides for a rent credit where part of the rent is credited to the option if the buyer purchase the property.  If the buyer stops paying, the lease allows the seller to simply evict.  The option contacts in these situation may contain very onerous (for the buyer) provisions such as any late payment on the lease terminates the option.  Unscrupulous sellers can use lease options to fleece unwitting buyers out of their options money, which is why these have a bad reputation and are illegal in some states. Violates the due on sale on the existing loan if there is one, which there almost always is.

There are other variations, but they're variations of these themes.  Lots of fancy terms have been cooked up over the years for various owner financing schemes.  Not all these are legal in all states.

Samantha M. · Answer

Jon Holdman Wow, thanks for the informative reply! I really appreciate how you structured it as well, from strongest to weakest.