Owner Financing vs. Lease Option - What's the Point

What is it?


People have been utilizing lease options and owner financing for many reasons. Both have advantages and disadvantages. Let’s start off with what they are and why they may work for you.

A lease option or Rent to own as you may have heard it called - With a typical lease option, A home owner / seller is willing to lease you a home for a period of time sometimes allowing a percentage of what you pay towards the lease to be credited towards your down payment on the purchase of a house. Then you would either bet a bank loan or the seller would owner finance it to you.

Owner financing or hard money loan - A seller is willing to sell you their house and take the position as the bank. The seller typically asks a little more for the house or a higher interest rate then you would pay at bank. Sellers that do this often ask for a balloon mortgage or a short term loan.

What’s the point?

For the seller - There are many reasons sellers choose these options. First the seller may be trying to defer taxes on the sale of the home by only collecting so much money per year instead of all at one time. They get to be in the position of collect interest on the loan instead of a low yield investment account. They get a down payment often used to purchase another investment property, thus building a real estate investment portfolio.

For the buyer - With owner financing the buyer usually wants a substantial down payment around 10%-20% and sometimes more. The buyer could be an investor hoping to be able to rent the home for more than their payment (be careful with this one). The buyer does not have good credit but can make the payment and is looking for a nice place to live.

With a lease option - The tenant/buyer typically has enough money to put down for rent deposits, first , last & security. They want to build equity in the home they are living in. The buyer can get in with a smaller down payment although the rent period is longer.

Now that you know the up side, let's discuss the down side.

For the seller -

Owner financing if the buyer doesn't pay you will have to foreclose costing you time and money while they live in your investment property for free.

Lease option - These follow the terms of a lease if the tenant doesn't pay they can be evicted (in Florida about 45 days) The tenant/buyer typically doesn’t ever purchase the house but if your contract was written correct, they paid for the repairs & taxes while they were in the home. Your best hope here is they don't destroy the house and the properly maintained it. But when you get it back you can do it all over again.

For the buyer - On the lease option you are typically responsible for any repairs, the homeowners and renters insurance and the property taxes. If you don't pay, all monies paid are considered to be rent only & you lose the house and your money invested.

Owner financing - You have invested a lot of time and money in the house and the improvements. If it goes to foreclosure you will lose it all.

Word to the wise - After your REALTOR draws up an agreement satisfactory to all parties. Take it to an attorney to draw up either a lease option or the owner financing agreement to make sure everyone is protected.

For some reason people think when they purchase this way they don't need a home inspection or survey. Trust me you should have them even though most of these types of properties are sold "AS IS"

Another few things you need to consider. Most terms are negotiable; the seller is taking a risk working with a buyer in this situation and is pretty much in the drivers seat. Not everyone is willing to consider giving a buyer a lease option or owner financing.

Where do you find these opportunities? Call Kiefer Realty at 352-861-6000 or email KieferRealty@KieferRealtyPA.com . We work with hard money lenders and investors that have many of these homes available and waiting for you.

No matter which you consider remenber you build equity when you are buying a home instead of  paying off someone elses home when you are renting