Difference Between Land Contract and Rent to Own (With Table)

Purchasing a home may appear to be a simple procedure, but it may be time-consuming. Finding a mediator to help you out in the process, to search for a home, and simultaneously finally purchasing is a time-consuming process. The procedure is eased with the possibilities of land contracts and rent-to-own arrangements, but only when the terms are properly written out and understood by all parties concerned.

One of the vital steps in the home or property buying processes includes parties to comprehend these words. There exist two concepts that are often misunderstood by many people. They are a land contract and owning a rent. Are these two the same or different? Check this article to know more.

Land Contract vs Rent to Own

The difference between a land contract and rent to own is, a land contract is a full agreement focusing on buying or selling of properties. On the other hand, rent to own considers renting a piece of property or home and later giving the tenant a choice to buy it or not. Both a land contract and owning a rent are two different processes that involve purchasing or selling a residence. These two, on the other hand, are examples of seller financing.

When a buyer and seller enter into a straight contract for the purchase of a property and pay a lump sum amount of money upfront, it can be paid in instalments until the entire balance is paid. After then, the buyer receives ownership of the property through a land contract. The purchasing obligations in a land deal are included. By signing a finance agreement, the buyer commits to purchase the entire property.

The contract rent to own essentially allows home buyers to rent a home and then choose to purchase it after a set length of time. It might be accomplished by making extra lease payments or paying a higher rent at that time. The rent-to-own agreement has fewer commitments. The buyer in a rent to own agreement has the option to buy the home or not. The paid interest is considered mortgage interest by the person who wants to buy the property.

Comparison Table Between Land Contract and Rent to Own

Parameters of ComparisonLand ContractRent to Own
DefinitionThe lump-sum amount is paid at the beginning and then adjusted with instalments thereafter to buy the property.Rent is owned and then if the tenant wish then buys the property by paying lease payments or larger rent.
ObligationsIncludes purchase obligations. Includes fewer obligations.
CommitmentThe buyer commits to buy the property.Depends upon the buyer and no such commitment is involved.
Interest payment consideration Income for the seller.Mortgage interest for the buyer.
Ownership RightsThe major percentage is secured with the buyer and less with the seller.The major percentage is secured with the seller and less with the buyer.

What is Land Contract?

When a buyer and seller enter into a straight contract for the purchase of a property and pay a lump sum of money upfront. After that, it can be changed with payments until the full amount is paid. After that, the buyer receives the property in his name, which is known as a land contract. Purchase responsibilities are included in a land deal.

By signing a financing agreement, the buyer commits to purchasing the entire property in a land contract. The interest payment is treated as wages or revenue by the person selling the property. The majority of ownership rights are secured with the buyer, so in the case of a land contract, the seller has no or limited ownership authority over the property.

What is Rent to Own?

The contract rent to own essentially allows property purchasers to rent a home while still having the option to purchase it after a set length of time. It can be accomplished by making greater rent payments or paying more lease payments throughout that period. Rent-to-own agreements have fewer responsibilities. The buyer has the option to buy the property or not in a rent-to-own deal.

The paid interest is considered mortgage interest by the person who is willing to acquire the property. Until the property is sold, the seller retains ownership of the property. Buyers seek finance for the intended purchase after the agreed-upon period has passed. In this case, compared to standard sale choices, the property may be more expensive to purchase in the long term.

Main Differences between Land Contract and Rent to Own

  1. When direct contracts are done between the buyer and the seller for purchasing of property by paying a lump sum of money in the beginning. It can be adjusted with instalments thereafter until the due amount is fully paid. Later, the buyer gets the property in his name, which is a land contract. On the other hand, the contract rent to own gives the home buyers a chance to rent the house and a choice to buy it after a fixed period. It can be done by either paying lease payments or larger rent during that time.
  2. Land contract and owning a rent, both are a variety of process which includes buying a home or selling it. However, these two are examples of seller financing.
  3. The land contract includes purchase obligations. Whereas the agreement rent to own includes fewer obligations.
  4. In a land contract, the buyer gives his commitment to buy the full property by signing a financing agreement. On the other hand, in rent to own agreement, the buyer has a free choice whether to buy the property or not.
  5. The one who sells the property considers the interest payment as salary or income. On the other hand, the one who is willing to buy the property considers the paid interest as mortgage interest.
  6. The majority of the ownership rights are secured with the buyer. Therefore the seller has no or less ownership control over the property in case of the land contract. On the other hand, ownership rights are secured with the seller until the property is finally sold.

Conclusion

Agreements and contracts like Rent to own and land contracts involve buying or selling and renting of the property sooner or later. In the land contract scenario, it is observed that the person selling the house believes the interest payment to be a salary or income. Because the buyer owns the majority of ownership rights, the seller has little or no influence over the property.

However, in the case of rent to own agreement scenario, it is observed that, until the property is finally sold, the seller retains ownership rights. And according to the buyer, the interest paid is a type of mortgage interest. Here, the tenant first needs to take the house as rent and then chose to leave or buy it.

References

  1. https://link.springer.com/content/pdf/10.1007/BF00171362.pdf
  2. https://onlinelibrary.wiley.com/doi/abs/10.1111/1540-6229.00500
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