Iam sure the laws will vary on this from state to state. In Kentucky we do a lot of owner finance using a variety of methods. Contract for deed, lease with option to purchase, deed with mortgage are the ones I am most familiar with. I have both bought and sold property here using the various methods and never had a problem.
The deed with mortgage is prolly your best way to go as a buyer, it does strengthen your case a little bit if something goes awry and you end up in court later down the road. Its difficult to get a seller to go along with this as it drastically increases his risk factors and can be a real pain in the backside to recover the property in event of default. Another issue I have with deed with mortgage in this state is the double taxation thing. Once the buyer files his deed, he begins to pay the property tax, thats fine, but then the seller gets taxed the same amount for holding the mortgage! (The mortgage becomes an asset and is taxed accordingly)
Contract for deed would be your next best but again, most sellers dont like it for the same reason they wont sign over the deed to someone who "promises" to pay. Its amazing how many well intentioned folks dont keep their word.
Lease with option to purchase. This one is the one I use most often. Its fair to both parties and creates the least hassle for me if someone flys the coop in the middle of the night. (happens all the time) You are essentially renting/leasing the property, with no legal rights beyond possession/use of said property during the lease period and even then only if you keep your rent paid and follow all the other terms of the lease. If you suddenly dissappear, I have the right to reenter the premises, clean up the mess, and get on with my life without having to go to a lot of expense and losing months waiting to get the case in front of the judge. On your side of the coin, you have all the rights of use and possession of the property, the option to purchase clauses set the purchase price, and the specifics of the deal so you are legally protected as well, as long as you hold up your end.
Normally my lease options call for a set monthly rent, with a 60 day default clause. This enables the buyers to ride my credit line for a couple months without losing their property for late payments. (hey, I have broken a leg, and was out of work, a lil safe zone is not a bad thing) The option clause spells out the terms of purchase if/when someone exercizes their option to purchase. At that point, all the rent that has been paid is counted as amortized payments just as though they had been purchasing on a contract for deed basis. They pay me the calculated balance due, I use part of that money to pay off my note at the bank, I give the new owner a general warranty deed, they have it recorded at the country court clerks office and then I take whatever money I have left, head for the liquor store and tobacco shop and stock up on the essentials. life is good.
