The world of real estate can be simple and cut-and-dry when it comes to becoming a home owner—find an agent, search for a house, buy said house and live happily ever. But, the typical road to purchasing a house is not for everyone. In some cases, home buyers need other creative options for purchasing a home, including contract sales, also known as land contracts or contract for deed, and rent-to-own, also called a lease purchase. It is important to understand the differences between the two in order to choose the best option for your needs.
In the case of contract sales, the monthly payment consists mainly of principal, which goes directly to the purchase of the house, and a small amount of interest, which is agreed upon by the buyer and seller and goes to the seller for acting as the financier. With rent-to-own options, the distribution of the monthly payment favors the seller, with most of the monthly payment going to the seller as rent and a small portion going toward the buyer's down payment to purchase the home later.
In the contract sale, the purchase price is determined and agreed upon upfront. At the end of the agreement, the buyer purchases from the seller in the form of a large balloon payment. The balloon payment is the purchase price minus the principal the buyer had been paying each month. In rent-to-own situations, the buyer has an option to purchase the home at the end of the agreement for a predetermined price. After the agreement ends, the buyer then obtains a mortgage from a third party to pay the seller for the agreed upon price of the home minus the down payment they built up through the monthly rent.
When a buyer and seller enter into a contract sale, the buyer takes full possession of the home. He receives what is known as an equitable title, which means he can build equity into the property that he can borrow against. The buyer then receives the actual title to the home when the agreement ends. With rent-to-own, the seller maintains full possession and after the agreement period ends and the sale executed, the buyer takes full possession with title.
Contract sales benefit buyers who cannot get a mortgage at all or who do not want to mess with the mortgage process. Because everything is financed by the seller, the buyer does not have to go through the background checks and pay all the associated fees that go along with a mortgage. Rent-to-own helps buyers who have no cash for a down payment by helping them build up enough capital through the rent payments.
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