Land Contracts and Lease Options: Buying From the Seller Over Time
How land contracts (contracts for deed) and lease options work, how they differ from seller financing, California's rules, and the risks to buyers and sellers.
Updated & fact-checked Figures are linked to their sources at the end of the article.
Land contracts and lease options are two ways for a buyer who cannot get a mortgage yet to buy a property from its owner over time. In both, the seller keeps legal title for a period while the buyer pays. That is the main difference from a vendor take-back or seller carry-back mortgage, where the buyer takes title at closing and the seller holds a mortgage.
Both arrangements are mostly a creature of U.S. state law, and California, where UBU Financial works, has specific rules for land contracts. This article explains how each one works, what can go wrong for each side, and what to put in writing. It is general information, not legal advice; these arrangements need a real estate lawyer on both sides.
What a land contract is
A land contract, also called a contract for deed or instalment sale contract, is an agreement in which the seller finances the purchase and keeps the deed until the buyer has paid in full or met other conditions. The buyer usually takes possession and pays the property taxes, insurance and maintenance while paying the seller in instalments.[7]
California calls this a “real property sales contract” and defines it as an agreement in which one party agrees to convey title to real property to another on the satisfaction of conditions set out in the contract, and which does not require conveyance of title within one year of the contract being made.[1]
What a lease option is
A lease option combines a lease with an option to buy. The buyer rents the property, usually pays a separate option fee, and has the right but not the obligation to buy at an agreed price before the option expires. Some agreements credit part of the rent toward the price. If the tenant does not exercise the option, the lease simply ends. Check what the agreement says about the option fee and any rent credits; they are often non-refundable.
A lease-purchase is different: the tenant agrees to buy, not merely has the right to. Read the document; the label on it is less important than what it obliges each party to do.
| Item | Seller financing (VTB or carry-back) | Land contract | Lease option |
|---|---|---|---|
| Who holds title during payments | Buyer | Seller | Seller |
| Is the buyer committed to buy? | Yes, the sale has closed | Yes | No, it is an option |
| What the buyer pays | Mortgage payments to the seller | Instalments of the price | Rent plus an option fee |
| If the buyer stops paying | Seller enforces the mortgage | Depends on the contract and state law; buyer may lose payments made | Lease ends; option fee and rent are usually lost |
| Buyer’s protection | Registered ownership | Contract, ideally recorded | Option agreement, ideally recorded |
California’s rules on land contracts
California’s Civil Code sets several rules for real property sales contracts. They are summarized here from the Code; the official text is on the California Legislative Information site.
Key protections in California Civil Code sections 2985 to 2985.5
No separating the land from the contract
The owner may not transfer the property without also assigning the contract, or transfer the contract without the property (section 2985.1).
No new borrowing beyond what is owed
A seller under an unrecorded contract who places new encumbrances on the property, without the parties’ written consent, that together with existing ones exceed the amount then due under the contract commits a public offence (section 2985.2).
Buyer’s payments must go to the seller’s mortgage first
A seller who receives an instalment while a payment is due on the seller’s own mortgage must apply it to that payment; using it for anything else is a public offence (section 2985.3).
Tax and insurance money is held in trust
Amounts the buyer pays for insurance and taxes must be held in trust for that purpose (section 2985.4).
The contract must state the payment period
It must say how many years it will take to complete payment, and the basis of the tax estimate (section 2985.5).
These rules come from sections 2985.1 to 2985.5.[2][3][4][5][6] Section 2985.2 applies to contracts that are not recorded, which is one more reason for buyers to record theirs.
The risks for buyers
The U.S. Consumer Financial Protection Bureau has warned about contracts for deed on homes. It says that because the seller holds the deed until the contract is fulfilled, a buyer who misses a payment can face eviction quickly, typically losing the money and work already put into the property, and that buyers can be caught by a balloon payment they cannot make or by a seller with liens on the property or who refuses to transfer the deed.[7] The advisory is aimed at home buyers, but the same structural risks apply to an investor buying a small apartment building or a motel this way.
The risks for sellers
- Default and recovery. If the buyer stops paying, the seller has to recover possession and may have to go to court. The property may come back in worse condition.
- Your own mortgage. If the seller still has a mortgage, its terms may treat a land contract or long lease option as a sale or a breach. Check with the lender.
- Ongoing liability. As the owner of record, the seller may still face claims tied to the property, so insurance must name both parties correctly.
- Lease rules. In a lease option the buyer is also a tenant, so landlord-and-tenant law can apply, especially to residential units.
A note for Canadian readers
Arrangements with a similar effect exist under names such as “agreement for sale” or “rent-to-own,” but the rules come from each province’s land-registration and landlord-and-tenant law, not from the California rules above. A Canadian buyer and seller who want the seller to finance the purchase will often find a vendor take-back mortgage simpler, because the buyer owns the property and the seller’s security is an ordinary registered mortgage. Speak to a Nova Scotia lawyer before signing either kind of agreement.
What to put in writing
Price and how it is paid
Purchase price, down payment or option fee, instalments or rent, any rent credit, interest, and the date the balance is due.
Who pays what
Taxes, insurance, repairs and capital improvements, and who keeps the benefit of improvements if the deal ends.
Default
What counts as default, notice and cure periods, and what each side gets back if the contract ends.
Title
The seller’s duty to keep the mortgage current and not add debt, and when and how the deed is delivered.
Recording
Record the contract or a memorandum of the option so the buyer’s interest shows on title.
For other ways to fund a property a bank will not finance yet, see our overview of financing hard-to-finance property.
Sources
- California Civil Code § 2985 (copy hosted by FindLaw; official text at leginfo.legislature.ca.gov) — FindLaw, Current as of January 1, 2026. Checked 2026-10-12.
- California Civil Code § 2985.1 (copy hosted by FindLaw) — FindLaw, Current as of January 1, 2026. Checked 2026-10-12.
- California Civil Code § 2985.2 (copy hosted by FindLaw) — FindLaw, Current as of January 1, 2026. Checked 2026-10-12.
- California Civil Code § 2985.3 (copy hosted by FindLaw) — FindLaw, Current as of January 1, 2026. Checked 2026-10-12.
- California Civil Code § 2985.4 (copy hosted by FindLaw) — FindLaw, Current as of January 1, 2026. Checked 2026-10-12.
- California Civil Code § 2985.5 (copy hosted by FindLaw) — FindLaw, Current as of January 1, 2026. Checked 2026-10-12.
- Consumer advisory: Help is available for people facing housing problems because of a contract for deed — Consumer Financial Protection Bureau, August 13, 2024. Checked 2026-10-12.
