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.
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.
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]