Contract for Deed
With a contract for deed, the seller of a property and the person who wants to buy enter into a contract in which the buyer agrees to pay off the price of the property in installments. The contract may or may not require a down payment. As with a traditional mortgage, each payment includes interest. While the seller in a contract for deed holds the title in the property until it is paid off, the buyer holds what is known as an equitable title. He can live on the property and make improvements and he is responsible for paying the taxes and insurance. In many ways, a contract for deed acts like a traditional mortgage, except the buyer can’t use the equity he’s building in the house to take out a home equity loan.
Lease to Own
With a lease-to-own agreement, the seller of a property puts part or all the rent you pay toward the final purchase price of the house. The buyer usually sets the final price of the property at the time you enter into the lease-to-own agreement and grants the renter the exclusive option to buy the house for a specified time, such as a year. If the renter decides not to exercise her option to buy, the seller keeps the rent, the agreement is void and the seller can put the house back on the market. If the renter does decide to buy, the payments she’s made to that point are credited against the agreed-upon purchase price. At this point the parties involved can agree that the renter will seek a traditional mortgage, or they could enter into a contract for deed. During the term of the lease-to-own agreement, the relationship remains one of landlord and tenant. The landlord is responsible for paying property taxes and owns the property in the eyes of the law.
Here is a good explanation of the two: http://budgeting.thenest.com/contract-deed-vs-lease-own21370.html
Since both lease-to-own agreements and contracts for deed don’t involve banks and financial institutions, they require less paperwork than a traditional mortgage. Someone with less-than stellar credit or who doesn’t have the savings for a big down payment can enter into one of these agreements, so they’re an avenue to owning a home for people who might not be able to otherwise afford one. A lease-to-own agreement allows a landlord to maintain control of the property while the tenant is paying on it but offers the security of a potential buyer down the road.
As the buyer in a lease-to-own contract, you’re still essentially renting the property and will need permission from your landlord to make improvements on the property. As a seller in such an agreement, you’re still stuck in the landlord role, collecting rent without any interest attached, always with the potential for the tenant to back out of the sale. With a contract for deed, you’ve sold the property but still hold the title, and instead of getting your money all at once from a bank, the payments arrive each month.