There are four primary frameworks available as real estate contract options for a transaction handled without an agent involved. Let’s examine each option to see which one makes sense for your specific home sale.
A real estate Purchase Agreement typically uses one of four basic frameworks under do-it-yourself transactions:
1) FSBO Real Estate Purchase Agreement – this framework matches the most common real estate contract option for properties in general. With a For Sale by Owner property, it assumes that the Buyer is either paying cash or has arranged for a mortgage loan with a bank or lender to pay the Seller for their real estate transaction. This real estate contract option follows the same procedure for a transaction as one overseen by a real estate agent: contract is drafted and signed; purchase price is paid from the Buyer or Buyer’s lender; a new Deed is prepared and signed by Seller naming the Buyer as the new owner of the property.
2) Real Estate Purchase Agreement with Seller-Financed Mortgage – this format is similar to the FSBO Real Estate Purchase Agreement, in that the Seller transfers title to the property to the Buyer using a Deed at the beginning of the transaction. However, what is different in this format is that the Buyer is not providing the Seller with the full purchase price right away. Rather, the Seller is ‘financing’ this transaction. The Buyer will give the Seller a down-payment and first payment and Buyer then grants Seller a mortgage on the property that the Buyer is purchasing from Seller. This mortgage acts as security to ensure that the Buyer pays the full amount owed. After the deed is recorded, the Buyer is responsible for all costs associated with the ownership of the property: taxes, insurance, repairs and maintenance, etc. Should the Buyer default in paying the purchase price, the Seller may need to proceed with foreclosure to be paid the balance due from the Buyer.
3) Land Contract – the Seller retains title to the property until all payments are made. When the final payment is made, Seller provides the Deed to the Buyer for recording. The Seller benefits in retaining ownership of the property, because if the Buyer fails to make payments, the Seller can, with some exceptions, proceed with a simple eviction or forfeiture action to remove the Buyer from the property. (In some states, after the Buyer has remained in the property for a certain period of time — 60 months, for example — or paid a certain percentage of the purchase price, the eviction proceeding is no longer available and the Seller must proceed with foreclosure. In Florida, foreclosure is the only remedy to remove the Buyer regardless of the time spent possessing the property.)
A Land Contract will generally require the Buyer to pay the property taxes, insurance, and maintenance costs for the property, but the Seller is still ultimately responsible for them.
A Land Contract usually requires that the Buyer pay the balance of the purchase price within a certain period of time, usually 36 to 60 months. Upon payment of the balance of the purchase price, the Seller then provides a deed to the Buyer for recording. Ownership transfers at that point in time.
When using a Land Contract, the Seller can maintain a mortgage on the property that is being sold to the Buyer. However, the balance of the mortgage owed by the Seller may not exceed the amount that the Buyer owes to the Seller for the purchase of the property. Usually, the Seller’s mortgage will be paid, and the mortgage removed from record, when the Buyer pays the Seller the balance of the purchase price (although the Seller may also use the monthly payments received from the Buyer to pay off the existing mortgage).
4) Lease-to-Own Contract – the Buyer simply leases the property with an option to buy it for a set price within a certain deadline.
In this type of agreement, the parties sign a written agreement that contains both a lease and an option-to-buy provision. The Buyer will usually be required to pay the Seller an agreed amount of money up-front for the right or option to later purchase the property. This payment is usually not applied toward the purchase price and is non-refundable should the Buyer decide not to exercise the option to purchase (but these terms are negotiable).
The Buyer agrees to lease the property from the Seller for a predetermined monthly lease amount. A portion of the monthly lease payment is typically applied toward the purchase price should the Buyer decide to exercise the option and purchase the property at a later date. During the option period (generally from one year to three years), the Buyer may notify the Seller in writing that he or she wants to “exercise” his or her option to purchase the property.
In the Agreement, the Buyer and Seller can agree to the purchase price to be paid for the property by the Buyer, or can agree to pay market value at the time the option is exercised. Most Buyers and Sellers, however, want to lock in the future purchase price at the time the agreement is signed.
This type of agreement benefits the Buyer in that Seller may not sell the property to any third party during the option period. And if the Buyer doesn’t exercise the right to purchase, a portion of the monthly lease paid to the Seller is applied toward the balance of the purchase price. The Buyer is not required to exercise the option to purchase.
The Seller is responsible for paying the property taxes, insurance, maintenance and repair costs until the Buyer exercises the option to purchase.
A benefit to the Seller is that should the Buyer default in the monthly lease payments, the Seller may bring a simple eviction action to remove the Buyer from the property. Further, should the Buyer not exercise the right to purchase, the Seller retains all monthly lease payments as well as the option money paid by the Buyer. Should the Buyer not exercise the option and purchase the property prior to the end of the option, the option expires and the Seller is not required to sell the property to the Buyer.
Pros and cons exist for each party under each of these real estate contract options. To get a full understanding, we suggest you read as much information as possible in the Learn More section. (Don’t worry: the articles are short, to the point, and written in simple-to-understand language.)
Many of the considerations over which framework to pick are state-specific, too. Legal and tax requirements imposed by individual states can greatly affect which framework works best. To understand these additional considerations, read the information about your particular state in the State-Specific Overviews.
RealtyPact does not recommend any one framework for any specific transaction. The outlines above are general in nature, are not to be relied upon as legal advice and are not to be interpreted as a recommendation of one framework over the others; as only the Buyer and Seller are aware of all the facts of a particular personal situation. Both parties should review each of the framework offerings available from RealtyPact to determine which one is most appropriate.