Contract for Deed vs. Lease-Option vs. Deed of Trust: Which Fits Your TN Owner-Financing Deal?
- willbaugher
- Aug 7
- 3 min read
If you're buying or selling a home with owner financing in Tennessee, choosing the right structure is just as important as choosing the right property. In this blog, we’ll break down the three most common types of owner-finance agreements—Contract for Deed, Lease-Option, and Deed of Trust—and help you decide which is best for your situation.
Whether you're a buyer looking for a second chance at homeownership or a seller looking to create monthly cash flow, understanding these terms will help you make smarter decisions and avoid costly mistakes.
🔍 What Is Owner Financing in Tennessee?
Owner financing (or seller financing) is when the seller allows the buyer to purchase a home without going through a traditional mortgage lender. Instead, the buyer makes monthly payments directly to the seller. This can be a great option if the buyer has poor credit, is self-employed, or simply wants a faster, more flexible process.
🏡 1. Contract for Deed (Also Called “Land Contract”)
How it works: The buyer agrees to pay the seller in monthly installments over time. The seller keeps the legal title to the home until the full price is paid.
Key features:
Buyer gets equitable title (the right to live in and use the home).
Seller keeps legal title until final payment.
Often no bank or escrow involved.
Common in lower-cost or rural property sales.
Pros:
Easier and faster to set up.
No need to go through a lender.
May work for buyers with credit challenges.
Cons:
Buyer doesn’t get the deed until the loan is paid off.
Harder to refinance or sell before full payment - but it's certainly doable
If the buyer defaults, eviction is easier for the seller (no foreclosure may be needed).
Best for: Buyers who need flexibility but are committed to long-term payments. Sellers who want simple repossession if needed.
📝 2. Lease-Option (Rent-to-Own)
How it works: The buyer rents the property for a set period, with the option (not the obligation) to purchase it later. A portion of the rent may go toward the purchase price, but many sellers will not allow this.
Key features:
Two contracts: a lease and an option agreement.
Buyer can walk away if they change their mind (but will likely lose option fee).
Seller keeps title throughout.
Pros:
Lower upfront cost than a purchase.
Try before you buy—live in the home before committing.
Great for buyers working on credit or saving a down payment.
Cons:
No guarantee the buyer will end up buying.
Seller may not count rent credits if buyer walks away.
Buyer has no legal claim if they don’t exercise the option.
Best for: Buyers who aren’t ready to buy yet but want to lock in a future purchase. Sellers who want rental income now with a possible sale later.
🏦 3. Deed of Trust (Standard Owner-Financed Mortgage in TN)
How it works: The seller acts like the bank. The buyer gets the deed at closing, and a Deed of Trust is recorded with the county to secure the loan.
Key features:
Buyer takes legal ownership immediately.
Seller holds a lien against the property (just like a bank would).
Foreclosure required if the buyer defaults.
Recorded with the county for legal protection.
Pros:
Strong legal protections for both parties.
Buyer builds equity from day one.
Easier to refinance or sell.
Cons:
Requires more paperwork (promissory note, deed of trust).
Seller may have to go through foreclosure if the buyer stops paying.
Best for: Buyers who want full ownership upfront. Sellers who want the most secure legal setup for long-term financing and a larger down payment.
🆚 Side-by-Side Comparison
Feature | Contract for Deed | Lease-Option | Deed of Trust |
Buyer Gets Deed? | No (until paid off) | No | Yes (at closing) |
Legal Protection for Seller | Moderate | High | Strong |
Can Buyer Build Equity? | Limited | No | Yes |
Risk of Default for Seller | Easier to reclaim | Still holds property | Requires foreclosure |
Common in TN? | Yes (rural deals) | Yes | Yes (most secure structure) |
💡 So, Which One Should You Use?
If you're a buyer:
Choose a Deed of Trust if you want full ownership and are ready to commit.
Choose a Lease-Option if you need more time or are still building credit.
Choose a Contract for Deed if you're buying land or a lower-priced home and need simple terms.
If you're a seller:
Use a Lease-Option for flexible buyers and lower-risk deals. Consider that you may be responsible for some repairs during the lease period.
Use a Deed of Trust for long-term financing with better legal protection.
Use a Contract for Deed if you want to keep title until the buyer proves reliable.
🏠 Need Help With Owner Financing in Tennessee?
At SEPFinancing.com, we connect buyers and sellers across Tennessee to make owner-financed home sales fast, simple, and fair. Whether you’re buying your first home or selling your property without a bank, we’re here to help.
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