Land sale contracts, lease/options, and seller-financing all allow a buyer to acquire an interest in property while leaving the seller with title or another form of security. So what purposes are served by each?
For a seller, a land sale contract typically provides the most protection. In this type of transaction, title remains with the seller until the buyer makes the final payment. If the buyer defaults, the seller may exercise the remedy of statutory forfeiture, which is faster and simpler than foreclosure. However, the seller must beware if the seller has a mortgage on the property, since a land sale contract triggers the typical “due on sale” clause. Thus, the seller must either obtain approval from its lender, or else pay off the mortgage, to avoid defaulting on its own mortgage.
On the surface, a lease-option might appear to provide the seller with even greater security. Such agreements usually provide that the optionee’s breach of the lease agreement also extinguishes the option. However, that protection is often less than it appears. Even if the option is extinguished, it may continue to cloud the title and deter other possible buyers and lenders if it was recorded by the buyer. In that event, a seller might have to bring a quiet title action to show buyers and lenders that the property is free from the option. And, like a land sale contract, an option agreement triggers the “due on sale” clause of a typical mortgage.
The buyer has the greatest protections in a seller-financed sale, wherein the buyer takes title subject to a trust deed or mortgage securing the buyer’s debt to the seller. If the buyer stops paying, the seller’s remedy is to foreclose, which is subject to statutes providing the buyer with rights to reinstate or redeem the trust deed or mortgage.