On occasion, a real estate investor is asked to owner finance a transaction. Most often, the request comes from a tenant who would like to buy the property but cannot presently qualify for a traditional home loan. Or, the investor has a property thatlease purchase or owner finance could be sold and a buyer makes an offer with a similar request; finance the transaction. Which is better, a lease-purchase or an owner finance?

 To understand this scenario, it’s important to be clear on what a lease-purchase really is. First, it’s not a sale. At least not yet. A lease-purchase agreement is an arrangement where the buyers rent from the property owner and agree to buy the property at a predetermined price and date in the future. Common lease-purchase terms provide up to two years for tenants to arrange for a mortgage.

For instance, a lease purchase might stipulate that the tenants pay $200 a month above the market rent of $1,500 every month, with the additional $200 going toward an eventual down payment. At the end of the two year period, the buyers have accumulated at least $2,400 plus whatever additional funds required to buy and finance the property priced at $150,000. At the end of two years, the tenants close on the home.

With an owner finance agreement, the property is sold at contract. The buyers provide a down payment to the seller, and the property changes hands. What are the differences between the two scenarios?

The obvious is that with an owner-finance arrangement, the seller no longer owns the property. With a lease-purchase, the property doesn’t change hands until the lease-option period has expired. What if the buyers/renters suddenly find they can no longer pay the rent? With renters, an eviction notice is prepared. With an owner-finance transaction, a more expensive and lengthy foreclosure is the only way to recover the property.

An owner financed transaction can provide the owner with cash immediately, compared to waiting for two years for tenants to arrange for a home loan. That’s the tradeoff. If the owner can wait, then a lease-purchase contract might be the better choice to avoid the prospect of a default.