Owner Financing Faceoff (Vacant Land Edition): Lease-Purchase Vs. Mortgage

With owner financing, you either take ownership of both the property and a mortgage or simply rent the land until it is paid. Pros and cons exist for both.

There are many benefits using seller financing when buying vacant land and there are two main ways to do that: with a lease-purchase agreement or with a deed and mortgage. This article explains the difference between a mortgage and a lease-purchase agreement. Each offers unique benefits and challenges. First, let’s define them.

What’s the Difference Between a Mortgage and a Lease-Purchase Agreement?

Mortgage

When you buy vacant land with a mortgage, you take complete ownership of the property, meaning that your name appears on title. At closing, you will be asked to sign a promissory note, a document that outlines the terms of your mortgage. Typically, the promissory note and mortgage are recorded in the county records along with your deed. When the mortgage is completely paid, the lender records a “Satisfaction of Mortgage,” the documented proof that the loan has been paid in full or “satisfied.”

Lease-Purchase

When you buy vacant land with a lease purchase agreement, you do not own the property right away. The owner’s name appears on title as long as you make regular lease payments. Depending on your lease, all or a portion of your lease payment will go toward the eventual purchase of your property. When you accumulate enough rent credits to satisfy the purchase, you will be asked to complete closing documents required to transfer ownership into your name. The new deed is recorded in the county records.
Let’s explore the pros and cons of both.

Speed to Closing

If you are eager to get onto your property as soon as possible, a lease-purchase might be the way to go. Because no upfront title work is involved with a lease-purchase agreement, you can gain access to the land of your dreams with a stroke of a pen and a down payment. You’ll still need to go through the closing process to transfer title to your name completely, but this won’t happen for many months in the future.

📌Try this. To avoid surprises, go over the terms of the agreement with your landlord or lender including paying special attention to the payment due date, late payment policies, forbearance options, prepayment penalties, and closing procedures and costs.

Credit Score Impact

If you are concerned about impacting your credit score, a lease-purchase is a slightly better solution. Landlords of vacant land seldom request a credit score before leasing a parcel. However, due to the high cost of foreclosure, some lenders require a credit report and before approving vacant land financing. Both landlords and lenders have the ability to report payments to credit reporting agencies. So whether you lease or buy with a mortgage, a record of on-time land payments can build your credit and work in your favor.

📌Try this. Before entering into a contract, ask the owner how the lease or loan will be serviced and whether payments are reported to a credit reporting agency.

Fraud Protection

If you have concerns about the legitimacy of the transaction, a deed and mortgage could provide the extra protection you seek. While not fool-proof, professionals at title companies and real estate law firms specialize in finding and rectifying chain-of-title concerns, liens, property taxes and other issues related to a real estate purchase. They also offer title insurance, which means that if they miss something, you can receive compensation up to the amount of your policy.

📌Try this. Ask for proof of ownership and title insurance or request to process the lease through a local title company or attorney.
Buying vacant land with owner financing is a great way to start enjoying the property of your dreams sooner. If you are looking for affordable lots with owner-financing terms listed right up front, check out our inventory or vacant land and wholesale prices today.