Frequently Asked Questions
What is a Land Contract?
Also known as a contract for deed or an agreement for deed or a land installment contract is an installment sale agreement. It is a contract between the buyer and seller of real property in which the seller provides the buyer financing in the purchase, and the buyer repays the resulting loan in installments. Under a land contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically paid in periodic installments, often with a balloon payment at the end to make the time length of payments shorter than in the corresponding fully amortized loan (i.e., a loan without a final balloon payment). When the full purchase price has been paid including any interest, the seller is obligated to convey (to the buyer) legal title to the property. An initial down payment from the buyer to the seller is usually also required.
The legal status of land contracts varies between jurisdictions.
Since a land contract specifies the sale of a specific item of real estate between a seller and buyer, a land contract can be considered a special type of real estate contract. In the usual, more conventional real estate contracts, a seller does not provide a loan to the buyer; the contract either does not specify a loan or includes provisions for a loan from a different “third party” lender, usually a financial institution in practice. When third party lenders are involved, typically a lien, as part of a mortgage or trust deed, is placed on the property, in which the property serves as collateral until the loan is repaid.
This article is a good explanation of how land contracts work in Wayne County, MI
What is a Rent-to-Own contract?
In a rent-to-own transaction, the tenant lives on the real property and pay towards purchasing the property at a fixed price within a specific period of time, usually one to three years. As part of the contract, the renter may be required to make a nonrefundable deposit often included as part of a down payment at the end of the lease term. In addition to monthly rent, often an additional amount called a rent credit is paid into an escrow account during the lease period. This amount is added to the deposit and used as part of the down payment at the end of the lease term. This pushes the rent above the market rate but helps build savings for purchase if the buy option is taken. At the end of the lease term, the tenant is offered right of first refusal to purchase the property at the agreed upon sale price, or walk away and forfeit the deposit. If the tenant is unable or unwilling to exercise the option to buy, the owner is then free to rent or sell the property to another buyer, or to restructure the contract.
What is a Lease Purchase Agreement?
A Lease-Purchase Contract, also known as a Lease Purchase Agreement, is the heart of rent-to-own properties. It combines elements of a traditional rental agreement with an exclusive right of first refusal option for later purchase on the home. It is a shortened name for Lease with Option to Purchase Contract.
What is the right of first refusal?
Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. A first refusal right must have at least three parties: the owner, the third party or buyer and the option holder. In general, the owner must make the same offer to the option holder before making the offer to the buyer. The right of first refusal is similar in concept to a call option.