Owner Financing also known as seller financing is a Real Estate financing technique where the buyer borrows from the seller instead of, or in addition to a bank. The buyer may opt for this when they do not qualify for a bank loan for full amount or partial amount.
There are different kinds of owner financing options available to suite your needs. You can go for owner financing using a mortgage/deed of trust, a Contract for Deed/Land Contract, a lease purchase agreement or a lease option / rent to own. If you are new to these terms, don’t worry we have more detail about each one of them.
In a Mortgage or deed of trust the seller gives a loan to the buyer for an amount equal to or less than the purchase price. The seller will charge an interest on the loan amount given to the buyer just like a bank. This is applicable when buyer may not be able to take a loan from the bank for full or part of the purchase price of the property.
A Contract for Deed or Land Contract gives the buyer an “equitable title” which is not the same as a legal title. Only after the buyer has paid the full purchase price and the accumulated interest will the buyer receives the land deed.
Lease Purchase agreement resembles the typical rental leases where the land owner allows the tenant to occupy the property in return for a monthly rent. In addition to the rental agreement there is a contract for the buyer / tenant to purchase the property before the expiration of the lease. The purchase price will typically exclude the renal paid so far from the purchase price. This type of agreement is a bilateral contract as the seller and buyer both have a duty to perform. This type of lease is typically used when the buyer does not qualify for a mortgage and the two parties are in agreement to eventually buy and sale the property.
The Lease Option or Rent to Own also resembles the typical rental leases agreement with a caveat that at the end of the lease the tenant / buyer has the option, but not the obligation to purchase the property. The seller, however, has to sell the property if the buyer wishes to exercise the option. This is different from the lease purchase agreement as here the buyer has the option to buy and is not contractually obliged to do so. The lease will normally state the price at which the property is to be purchased by the buyer and also the duration for which the option (to buy) is exercisable. This type of contract is known as a unilateral contract since only the seller has the obligation to sell.
In case of a lease option or a lease purchase agreement the sellers and buyer will mutually decide on the sale price and rent that will be charged for the property. Both amounts are subject to negotiation and once the agreement is signed the sale price is locked. Even if the housing prices rise or fall during this time, the original agreed upon sale price is final.
The buyer and the seller may opt for any of these financing options based on their requirements and preferences.
(source: https://www.leasepurchasemadeeasy.com/lease-option.html )