3 thoughts on “What’s the difference between a real estate subject-to and a lease option?”
In a subject-to, the seller deeds the home to the buyer. The buyer owns the home now. However, the mortgage remains in the name of the seller. Thus, if the buyer defaults on the mortgage, the seller is still on the hook, and it affects his/her credit. A subject-to absolutely violates the lender’s due on sale clause. That doesn’t make it illegal, but it is a sale of equitable interest without prior lender approval. A subject-to is a very safe option for the buyer (who now owns the property), but can be risky for the seller (who is still on the hook for the mortgage, although he/she does not own the property).
In a lease option, the seller retains the deed, thus remaining the owner of the property. The seller agrees to rent the property to a tenant-buyer, and the tenant-buyer has the right (but not the obligation) to purchase the property at some point in the future. There’s debate in real estate circles about whether a lease option violates a lender’s due on sale clause. This is riskier for the buyer; if the seller can’t pay the mortgage, the lender can foreclose and the option holder is left with nothing.
A couple of other variations: A lease purchase is similar to a lease option, except now it’s a bilateral agreement. The tenant-buyer has committed to purchasing the property. This clearly violates a lender’s due on sale clause. It carries a similar risk for the buyer; if the seller can’t pay the mortgage, the lender can foreclose and the option holder is left with nothing.
Contract for deed: The owner holds the deed and the mortgage remains in the owner’s name. The owner commits that at some point he/she will transfer ownership to the buyer. Similar to a lease purchase, with the same risks.
Land trust: A land trust can be used to accomplish the same thing. In this scenario, the owner transfers the property into his own trust. The resident beneficiary (equivalent to the tenant buyer) lives in the property. The RB makes payments to the new owner (the trustee–a third party) who pays the mortgage and sends any additional revenue to the settlor (the owner). The land trust documents provide that at a certain point the property will be brought out of the trust and (usually) the RB has first right to purchase the property. This is a very safe method for both buyer and seller, and does not violate the lender’s due on sale clause.
I Buy and sell houses is right on the mark. One way around the Subject To situation is to require the buyer to execute a "Deed of Trust to Secure Assumption". That way if the buyer doesn’t make the mortgage payments, the seller can get the property back. It still could affect his credit, but he at least has the property back.
Subject to means that the seller hands you his mortgage coupon book and you make the payments. You did not go to the lender and introduce yourself or fill out any papers. You are the owner of the house.
Lease option means that you are a tenant. At some time in the future, you may buy the house or you may decide not to. It is at your option.
In a subject-to, the seller deeds the home to the buyer. The buyer owns the home now. However, the mortgage remains in the name of the seller. Thus, if the buyer defaults on the mortgage, the seller is still on the hook, and it affects his/her credit. A subject-to absolutely violates the lender’s due on sale clause. That doesn’t make it illegal, but it is a sale of equitable interest without prior lender approval. A subject-to is a very safe option for the buyer (who now owns the property), but can be risky for the seller (who is still on the hook for the mortgage, although he/she does not own the property).
In a lease option, the seller retains the deed, thus remaining the owner of the property. The seller agrees to rent the property to a tenant-buyer, and the tenant-buyer has the right (but not the obligation) to purchase the property at some point in the future. There’s debate in real estate circles about whether a lease option violates a lender’s due on sale clause. This is riskier for the buyer; if the seller can’t pay the mortgage, the lender can foreclose and the option holder is left with nothing.
A couple of other variations: A lease purchase is similar to a lease option, except now it’s a bilateral agreement. The tenant-buyer has committed to purchasing the property. This clearly violates a lender’s due on sale clause. It carries a similar risk for the buyer; if the seller can’t pay the mortgage, the lender can foreclose and the option holder is left with nothing.
Contract for deed: The owner holds the deed and the mortgage remains in the owner’s name. The owner commits that at some point he/she will transfer ownership to the buyer. Similar to a lease purchase, with the same risks.
Land trust: A land trust can be used to accomplish the same thing. In this scenario, the owner transfers the property into his own trust. The resident beneficiary (equivalent to the tenant buyer) lives in the property. The RB makes payments to the new owner (the trustee–a third party) who pays the mortgage and sends any additional revenue to the settlor (the owner). The land trust documents provide that at a certain point the property will be brought out of the trust and (usually) the RB has first right to purchase the property. This is a very safe method for both buyer and seller, and does not violate the lender’s due on sale clause.
Hope that helps.
I Buy and sell houses is right on the mark. One way around the Subject To situation is to require the buyer to execute a "Deed of Trust to Secure Assumption". That way if the buyer doesn’t make the mortgage payments, the seller can get the property back. It still could affect his credit, but he at least has the property back.
Subject to means that the seller hands you his mortgage coupon book and you make the payments. You did not go to the lender and introduce yourself or fill out any papers. You are the owner of the house.
Lease option means that you are a tenant. At some time in the future, you may buy the house or you may decide not to. It is at your option.