The term lease option and contract for deed are often used in real estate transactions as a type of “creative financing arrangements”, but there are subtle differences between these terms that will need to know as you embark on your real estate investment career.
An Option is simply a contract where money is paid for provide a buyer the “option” to purchase the property at or before sometime in the future. The amount paid for the option is usually not refundable and the option to buy is, as the work option implies, not mandatory for the buyer. The purchase amount can be a certain amount or “market value”. The option terms are quite flexible and negotiable between the buyer and seller.
With a Lease Option, the borrower will pay regular lease payments as a normal lease, but they also pay for the option with money that typically is not refundable nor does it count toward the purchase price. It typically has a clause in the option contract that does not allow the seller to sell the property to anyone else during the option period.
Unlike with a Lease Option where the lease payments typically don’t count towards the purchase price, a Lease Purchase will typically have a portion of the lease payments count toward the purchase price of the property.
Although it is technically a type of option contract, a contract for deed typically has the regular payments that the buyer is paying the seller count towards the purchase price until which time the purchase price is fully paid. The seller retains the title to the property until which time the final payment is made.
Lease options, contracts for deed, and other types of option contracts vary slightly from one another and can be quite confusing. You will want to speak to your tax advisor as these option contracts do have tax consequences. Be sure to chat with a good mentor for more guidance.