Difference Between Land Contract and Rent to Own

Buying any property may seem like a simple process, but it can be cumbersome. The process of finding an agent to assist in the process, searching for a house and making a purchase is quite tasking. With the options of land contracts and rent to own agreements, the process is simplified, only when the terms are clearly spelled out and understood by the parties involved. The understanding of these terms by all parties involved is the most essential step in the home ownership process.

What is Land Contract?

Also referred to as an installment sale agreement, this is a direct contract between a seller and buyer, whereby sellers provide the financing in the form of the property and buyers make payments through installments until the contract amount is fully settled. In this case, financial providers such as banks are not involved. An installment amount, usually a lump sum, however, is required, and the balance paid off over an agreed period of time. Once the contract amount is settled, the seller then transfers the title of the property to the buyer. A requirement to a land contract for buyers is the ability to finance the balloon payment, failure to which they risk foreclosure.

What is Rent to Own?

Also referred to as lease options, this is an option which allows home buyers to rent a house and thereafter purchase the option to buy it after an agreed period of time. The option to purchase begins through the payment of larger rent or lease payments during the period of time. After the agreed period of time, buyers seek for financing towards the intended purchase. In this scenario, the property may be more expensive to purchase in the long run as compared to traditional sale options.

Similarities between Land Contract and Rent to Own

• Both are a type of seller financing
• Both simplify the process of selling or buying a home

Differences between Land Contract and Rent to Own

Definition

Land contracts refers to direct contracts between sellers and buyers, whereby buyers make payments starting with an initial lump sum amount, and thereafter installments until the contract amount is fully settled, and the seller thereafter transfers the land ownership to the buyer. On the other hand, rent to own agreements refers to contracts between the buyer and the seller which allows home buyers to rent a house and thereafter purchase the option to buy it after an agreed period of time. The option to purchase begins through the payment of larger rent or lease payments during the period of time.

Obligations

A land contract carries purchase obligations as the buyer had already committed into a financing agreement for the full purchase. On the other hand, a rent to own contract involves less obligations whereby the buyer has the option, but is not obligated to buy the property after the contract period.

Tax implications

In a land contract, the seller reports the interest payment as an income while the buyer reports interest paid as mortgage interest.

Ownership rights

In Land contracts, ownership rights belong to the buyer hence the seller has less control over the property. On the other hand, in a rent to own agreement, ownership rights belong to the seller until the final purchase

Land Contract vs. Rent to Own: Comparison Table

Summary of Land Contract vs. Rent to Own

While land contracts refer to direct contracts between a seller and a buyer, whereby sellers provide the financing in the form of the property and buyers make payments through installments until the contract amount is fully settled. On the other hand, a rent to own contract refers to an option which allows home buyers to rent a house and thereafter purchase the option to buy it after an agreed period of time.

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