Lease Option Vs. Contract For Deed

What is the difference between a lease option and contract for deed? What offers us, as the investor, more protection when selling a home using these tools?



I am a mortgage broker and know that when using a lease option, the borrower must "purchase" the property at the end of the terms. Thus, if the option price is $80k and the appraised value is $100k, the LTV is still 100%. When using a contract for deed, the banks consider this a "refi" at the end of the terms. Thus, if he option price is $80k and the appraised value is $100k, the LTV for the loan is 80%. This means better and easier financing for the borrower/buyer.



I would like to know the benefits of each, though, as they seem very similar to me. Any help is greatly appreciated.

Comments(2)

  • richnathan8th April, 2007

    Agreement for deed is more or less seller financing. The seller acts like a lender. They hold title with an agreement to transfer the title when the debt is settled. You write a promissory note with the buyer (make sure you make a small arbitrage in interest).

    The 2 are similar with a few important differences. !st, you can evict a delinquent lease optioner, you must foreclose on an agreement for deed buyer. 2nd, the "purchase" happens at the begining with AFD and at the end with a lease option.

    I am not a laywer, but I hope this helps. I feel more comfortable with a lease option personally becasue of the legal costs of delinquency.

  • LeaseOptionKing8th April, 2007

    In some states, a defaulted CFD reverts to a Landlord-Tenant relationship, but you still have to give them a certain period of time to cure the deficiency (usually 30 days) before you can start the eviction. Also, many lenders will treat a L/O as a refi as well (though far fewer will). A CFD is better for Tenant (the Tenant gets deductions), but I feel a L/O is better for the Seller. Of course, each situation is different, and so is each state.
    [addsig]

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