What is the difference between Rent to Own, Lease Option to Buy, and a Land Sale contract? If there is a difference, which is the better way to go and how have you structured your deals to make it beneficial to you as the owner, and also beneficial to the buyer? I am looking into the possibility of doing my first one of these but not sure which is the better option.
Do you require a down payment or just treat it like any other rental and request the first and last month rent upfront and/or a deposit, or do they pay a down payment like if they were going to buy it from a bank?
Is there a certain percentage that HAS to be applied toward the principal to be legal and do you keep this in a separate acct like a deposit or do you pay it directly toward the bank principal if you yourself have it under a mortgage?
What are the risks involved besides the renter/buyer not paying? And if they don't pay, is the eviction process treated differently than a normal rental?
This would be in Idaho if I do it so if anybody knows Idaho law really well and how it applies to these types of contracts, that would be really helpful. Thanks in advance for any and all replies. I know it is a lot to try to cover.
NOT LEGAL ADVICE... Definitely want to consult with a real estate attorney prior to doing any of these.
Rent to own is a vague term that covers a number of different techniques, including lease-option, lease-purchase, and even land contracts. (Technically, a land contract is NOT rent to own, but some companies promote "rent to own" when they're actually using land contracts.) Which one is better all depends on your role, buyer or seller.
Here's a real quick breakdown:
Lease-option: A unilateral (one-way) agreement. The seller agrees to sell the property. However, the tenant-buyer has the option of buying or not buying. Generally, there's an up-front (usually non-refundable) option fee. Sometimes a portion of the lease payment is credited toward the purchase price. The option usually is for a set term, with a pre-set purchase price . But it's all negotiable. At the end of the option term, the tenant-buyer has the right (but not the obligation) to purchase for the previously agreed price. The tenant-buyer would obtain traditional financing from a bank.
Lease-purchase: A bilateral (two-way) agreement. The seller agrees to sell the property. The tenant-buyer agrees to buy the property. Generally, there's an up-front (usually non-refundable) option fee. Typically, a portion of the lease payment is credited toward the purchase price. The option usually is for a set term, with a pre-set purchase price . . . though that's all negotiable. At the end of the option term, the tenant-buyer has the obligation to purchase. The tenant-buyer would obtain traditional financing from a bank.
Land Contract/Contract for Deed: A bilateral (two-way) agreement, similar to a traditional mortgage with the seller acting as the bank. The seller agrees to sell the property. The buyer agrees to buy the property. There's typically an up-front down payment. The buyer makes monthly payments to the seller, usually amortized with interest. Sometimes these are structured with a balloon payment; after x years, the buyer is obligated to pay off the remaining balance to the seller, usually by getting new financing from a bank. At that point, the deed is transferred into the buyer's name.
So, in a land contract, there's no lease. The buyer is buying from Day One. However, as with the other possibilities, the deed actually isn't put into the buyers name until some point in the future.
There are a couple of other variations, too--from wrap mortgages to contract for deed. These are also subject to Dodd Frank compliance if selling to owner occupants.