​Lease options versus land contracts/deed of trust

From what I've been able to find, many states require a full-blown foreclosure through the courts to reclaim property that a buyer stops paying on. Especially for smaller deals, the prospect of dealing with an expensive, time-consuming, and hairy foreclosure kills any motivation to do seller financing.

After doing some digging, I read that you can do a lease with an option to buy, where reclaiming a property is an eviction instead of a foreclosure.

I read that the caveats are that a judge will rule your "lease with option" as a land contract subject to foreclosure law if it looks like a land contract. That means to avoid looking like a land contract, the lease with option should have three distinctive documents (as opposed to just one with land contract or two with trust deed):

1) the lease, which looks exactly like a lease and only a lease;

2) the option to buy, which reserves the property to the renter at an agreed upon price;

and 3) the purchase agreement, which only shows up only at the end of the lease term.

Additionally, any conspicuous huge fee up front will look like a down payment (smells like a land contract). I'm not sure, but I'm also guessing that the price of the property at the end of the lease should be the same or more than the up-front cash price, or else if the option price is less than the cash price, then the rent and option payments will look to a judge like principle payments in disguise and treat the deal as if it were a land contract.

Has anyone here considered doing the lease with option route, or know much about it?

My main questions would be:

1) Can the option price be less than the cash price without heavily risking a judge forcing a judicial foreclosure instead of eviction?

2) If no to question 1, what kind of buyer would be interested in renting vacant land for a set term and then buy full-price at the end? For a house, it makes sense that a low-credit low-capital buyer is interested in renting a place for a couple years while they build credit and money for a down payment, but what about vacant land?

2a) If the "buyer" would be fine just renting indefinitely with no equity, then I feel like the rent couldn't be cheap enough for the renter to feel worth it compared to other options, where at the same time the rent be high enough to be worth it for the owner's investment.

2b) For a buyer who does want to actually buy, does a construction loan from a bank include the cost of the vacant land, or is this something that banks do very often? I'm assuming that a buyer who can't pay cash now probably can't pay cash in a couple years, and will need a loan either way. Is there any market for buyers who want to "reserve" vacant land through a lease with option, and during the lease period they find a builder, agree on a building design based on the land, get a construction loan from the bank based on the option purchase price of the land + builder's quote, and then when the lease term is up (or sooner), the buyer buys the land at the option price (which is similar to the upfront cash price)? Or could a buyer instead typically put the property "on contract" pending sale while they do all of the above without all the lease stuff?

Or is the premise wrong entirely, and vacant land is generally excused from foreclosure through the courts for land contracts, making all the above pretty moot? My impression is that vacant land is not excused, and more and more states are requiring land contracts be foreclosed just like a standard mortgage.

Disclaimer, all the above is based on cursory reading, and not necessarily legally accurate at all.

I know quite a bit about lease options, and think they are a great option for houses. My lawyer also agrees. I have used them to sell some properties, and am offering one right now like this.

However on land, unless it was a commercial property, they are not common. In housing the benefit is they get a place to live (the lease) and have the locked in option to buy, plus in some cases have rent credits going toward closing costs or total price. You, as the seller also have 3 income points on a lease option (downpayment, monthly cash flow, sales price)

With land, its better to simply sell on a land contract. You will rarely find a buyer that wants to lease land with the option to buy unless it was say, commercial or ag land.

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@jawollbrink Thanks tremendously for the insight. How do you handle the risk of dealing with complicated, expensive, and long foreclosures on land contracts if not for using a lease option? Only land contract on bigger deals? Only invest in states that haven't yet required judicial foreclosures on land contracts?


Ok, it sounds like you are over thinking this. Don't talk yourself out of it before you start. First of all, it is good to know and be prepared but you also have to figure on the law of averages. You will not (or should not) have a ton of foreclosures. Like with rentals not all tenants are going to trash your properties, and so many other excuses people use to talk themselves out of investing in the first place. On the other hand, you can figure it into the cost of doing business.

I am not a lawyer, but I have heard of people having the buyer sign a quit claim and recording along with promisary note in escrow. Other land contracts offer the buyer who falls behind time, and then in some cases cash to quit their claim back and avoid judicial foreclosure. Other states are much easier to work in. But you CAN do business in ALL states, and make a profit. In a judicial foreclosure state that might cost you 2-3k for the process, require a larger downpayment and hold on to it as insurance against this happening.

Think about it, and prepare, but don't overthink to the point of not taking action.

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I have been in the real estate business for over 40 years and I have bought and sold a lot of properties by Lease Purchase and Mortgages. I have only foreclosed on less than a hand full. My theory is I stay friendly with the buyer, as much as possible and if a buyer does not pay I talk to them to find out their problem and then try to help them out someway and still make a profit. With houses I would pay their moving expenses and sometimes find them a new place to live. This business is all about negotiation. I can’t say that I haven’t lost money but it is rare. If you want every last dollar you are in the wrong business.