Given the difficulty in obtaining conventional financing, many sellers are considering alternative means of selling their properties. Two of the most common are a lease with option to purchase and some kind of owner carry financing, either a contract for deed or a junior deed of trust or mortgage. Although this brief article should not be taken as specific advice for a given situation, here are some things to consider in deciding whether or not to do that.
Both of these moves will violate the “due on sale” provision of your mortgage, potentially triggering a declaration of default and a foreclosure. There is no way around it. It doesn’t matter if there’s any documentation in the real estate records–the transaction itself creates the default. This is the first and most important consideration in making such a decision.
You are essentially underwriting a loan to the renter or buyer, and need to think like a loan officer. To evaluate the risk, you need at least as much documentation and information as a commercial lender would require.
The terms of the “buy” part of a lease with option to buy should be carefully considered, and agreed upon in advance.
An “option” means the buyer is not obligated to buy, unless and until the option is exercised. However, if the option is exercised in a timely manner in accordance with the contract, the seller is obligated to sell.