Bond for deed vs. lease purchase agreement
Purchasing real estate can be challenging, although it is a popular method of investing and generating income.
There are many different types of purchase agreements and financing arrangements available when buying or selling a property, which you’ll need to review carefully before settling on one option over another.
Lease purchase agreements and bonds for deed are two lesser-understood options for purchasing and investing in property, but they can both prove incredibly useful.
We’re going to look at the pros and cons of bond for deed vs. lease purchase agreement for those looking to purchase property through non-traditional financing agreements.
What exactly is a lease purchase agreement?
A lease purchase agreement or lease purchase contract is a legal arrangement applied to a range of large purchases, most commonly those of vehicles or property.
In the context of property, a lease purchase agreement enables you to control and profit from a home, with the option to purchase the property in the future.
Typically, you’ll pay a set amount per month to the owner of the property, which gives you the right to control over the dwelling. You can then let out this property and generate an income from it.
This is known as the property lease. You can also live in the property as a tenant, with your rent going towards the eventual purchase price, known as a lease to own agreement.
The second element of a lease purchase agreement contract or deed of lease is the option clause.
This clause sets out terms and a set price for which you may purchase the property in the future.
You do not have to purchase the property, however, this clause only details the “option” to do so.
What is a bond for deed?
A bond for deed is a type of property purchase agreement.
The buyer agrees to purchase the property from the seller by paying in installments.
The deed, or legal ownership, of the property is then transferred to the buyer upon full payment. It is also sometimes known as a contract for deed.
A bond for deed transaction might be used for a variety of reasons, including difficulty securing a loan for the full amount on the property.
This might occur due to credit issues, a lack of lenders in your area, or the condition of the property.
Its other benefit to the seller is that it allows them to control the deed to the property until payment has been made in full.
On the other hand, you should consider the disadvantages of a contract for deed agreement.
Despite the flexibility to purchase high-risk properties, buyers may find that they are less secure in their property.
Bond for deed contracts generally have harsher repossession terms and higher penalties for missed or late repayments.
Lease purchase vs. bond for deed: The differences
Lease purchases and bonds for deed are both established ways of financing and purchasing a property.
However, there are a few key differences that you should be aware of before entering into a purchase agreement:
The most obvious difference is the payment involved.
A lease purchase agreement involves paying rent towards a final sum, settled upon at the point of agreement, with the option to purchase at the end of the agreement period.
A bond for deed agreement also involves making payments over a specified time period. However, the buyer has already committed to making the purchase at the end of the specified payment period.
Security is another point of difference between the two agreements.
Under a contract for deed agreement, sellers may repossess the property after a single missed payment, whereas a lease agreed property offers tenants certain additional protections.
Obligation to buy
Both types of contract offer a method of purchasing property, but the obligation to buy at the end of the specified period is different.
A bond for deed agreement is a contract for purchase, meaning that the buyer pays directly towards the cost of the property and is contractually obligated to purchase.
By contrast, a lease agreement includes an option clause which provides exclusive purchase rights for a defined period of time.
The buyer is not obliged to purchase the property, although they will have paid into the agreement.
Buy or sell real estate properties with the right contract
Beneficial to buyers and sellers of property who struggle to obtain a traditional mortgage, lease purchase agreements and bond for deed contracts are alternative ways of purchasing property.
Comparing bond for deed vs. lease purchase doesn’t deliver one definitively better purchase option; rather, they offer costs and benefits to sellers and buyers.
It can be challenging to know which contract is right for you when it comes to buying and selling real estate.
Real estate contracts vary drastically in content and terms, so it’s crucial that you understand which contract is right for you, and the key points that should be included.
Real estate contract templates are a great starting point to understand what needs to be included, including buyer and seller protections to ensure that the transaction works in favor of both parties.
Those templates aren’t the only way PandaDoc can help those looking to create crucial real estate agreements.
Why not learn more by scheduling a 15-minute demo?