Land Contract Vs. Lease Option
A land contract is an outright purchase agreement for property, while a lease option is merely a rental agreement under which the renter also has an option to purchase the property at some future date. The key difference between the two documents is the timing of when an actual purchase occurs.
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Lease with an Option
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A lease option is a contract that provides for both the rental and the possible sale of a piece of property. The renter has the right to occupy the property and the option to purchase the property. The renter is under no obligation to exercise the option to purchase, but if the renter does exercise the option, then the landlord/seller has no choice but to sell the property The option is the renter's option, not the landlord/seller's option.
Land Contract
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A land contract, also commonly called a real estate purchase contract, is a present agreement to buy and sell a piece of property. There is no rental agreement, and there is no option. Instead, under a land contract, the seller agrees to sell and the buyer agrees to buy the property for a set amount and on a certain date. The buyer does not occupy the property until the closing of the sales transaction, at which time the buyer becomes the full owner of the property and not just a tenant.
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Payments
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A land contract generally involves only one payment, which is a cash payment for the full purchase price at closing. The buyer may agree to purchase the property for $100,000 and the buyer provides one single payment of $100,000 to the seller. A lease option, on the other hand, involves many different payments. The first payment generally includes both a rental deposit and an option payment. The renter also makes lease payments each month or year while the lease remains in effect. The renter may have the choice to extend the option by paying another option payment a few months down the road. The details are all subject to negotiation between the buyer and seller.
Time Frame
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A land contract typically designates a closing, or settlement, date. This is the date by which cash and a property deed must exchange hands between the buyer and seller. There is no set rule for when settlement must occur, but generally the settlement date is sometime between two weeks to six months of the date of execution of the land contract.
The time frames under a lease option agreement are a little more complex. First, a lease option typically sets forth a cut off for when the renter must exercise the option to purchase the property. Failure to exercise the option by that date means the renter loses the purchase option. The lease option also will define the terms of the lease agreement, which can be anywhere from one month to an unlimited number of years.
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References
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