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Rent to Own Agreement basics

Reviewed by Rocket Lawyer On Call Attorney  Malini Ganvir, Esq
If you are wanting to purchase a home, but your credit isn't quite where it needs to be, leasing a property with the option to buy may start you on your journey towards home ownership. Or, if you are having a difficult time selling property in a down market, a Rent to Own Agreement may help you increase your cash flow until you can sell.

Use the Rent to Own Agreement document if:

  • If you are a renter who eventually wants to buy a property that is currently for rent or for sale.
  • If you are a property owner looking to enter a rent-to-buy agreement with renters who need help preparing to be able to make a purchase.

As with any agreement, there are two sides to the contract. In this case, the seller and potential buyer have distinct advantages and disadvantages. Both parties would benefit from having the Rent to Own documents reviewed by an experienced real estate attorney.

Other names for this document:

Rent to Own Lease Agreement, Rent to Own Agreement Form, Rent to Own Contract

What is a Rent to Own Agreement?

A Rent to Own Agreement allows the potential buyer to enter a lease agreement with the seller with the intention of buying the property at the end of the lease. A Rent to Own Agreement includes much of what you'd see in a standard Lease Agreement, such as monthly payments and due dates, grace periods and late fees, property descriptions, tenant's and homeowner's name, and the number of years the lease will last. But a Rent to Buy Agreement will also include details like the option fee, how much of the rent goes towards the purchase, terms for violating the agreement, and how the purchase price of the property will be determined.

Rent to Buy: Advantages and disadvantages for buyers and sellers

The two sides of a Rent to Buy Agreement include the potential buyers and the party looking to sell the property. In most cases, the most advantages go to the seller, but in some cases the buyer also experiences great advantages.

Advantages for the seller:

The first advantage is a quick influx of cash flow from rent payments. And, long-term and steady payments. If the property has been difficult to sell, this could be a way to finally sell the property. Rents received combined with the option fee is often well-above the market average.

Disadvantages for the seller:

If the market changes, you are locked into the contract and cannot sell. If the contract includes a set purchase price, you may have to sell the property for less than the current market value. If the market moves in an unfavorable direction, the potential buyers could drop out and the owner would be left with a hard to sell and difficult to rent property with no incoming cash flow.

Advantages for the buyer:

If the buyer is working on improving their credit and do not have a down payment, an option to buy agreement gives them enough time to raise their credit score, pay off debt and pay towards a down payment. If a sale price is agreed upon, the buyer is protected from the home price rising and some equity will be earned by purchase time.

Disadvantages for the buyer:

There is a chance that the buyer will not be prepared to make the purchase at the end of the lease period. The potential buyer may lose their job, experience an illness or simply doesn't pay down debt. And in the end, the investment paid towards the option fee and extra rent paid will be lost.

What happens if the buyer chooses not to purchase the home?

This happens often. A lot can change within the two or three-year lease. Most contracts do not “require” the potential buyer to purchase. Even if the agreement is a “lease purchase” agreement, the buyer would still need to be able to qualify for financing. The standard contract is a protected right for the “option” to buy, but the renter generally still has the choice to not buy at the end of the term.

What happens to the options fee and extra rent paid?

Contract terms vary, but in most cases the seller keeps the option fee. Extra rent is usually handed in one of two ways. First, the seller may put the extra rent into a protected escrow account to be used towards the down payment. A second action some sellers take is to put the total of the extra amount paid off the purchase price of the home. How the extra rent will be managed should be included in the Rent to Own Contract. Either way, if the potential buyer backs out, the money goes to the seller.

What are some pitfalls to watch for?

Most Rent to Own Agreements are made “in good faith” that both parties are going to fulfil their side of the contract and that everything will go well. But sometimes bad things happen.

Some things to watch for include:

  • The seller not making their mortgage or tax payments.
  • The buyer not being able to afford to keep up their part of the property maintenance.
  • The buyer may discover disagreeing property flaws not seen before living there long-term.
  • Buyers needs to be wary of rent to own scams.
  • Some contracts may be nullified if rents are paid late.
  • Seller may try to make buying difficult if they are going to have to sell under market.

All contracts should be reviewed carefully, Rent to Own Agreements included. While there are numerous things to watch for, many Rent to Buy Agreements work out well for both parties. If everyone does their part, aspiring homeowners can eventually purchase their own home and sellers can benefit from steady rents and ultimately sell the property to enthusiastic buyers.

If you are considering entering into a Rent to Own Agreement as a buyer or seller, it may be helpful to talk to a lawyer to have your contract reviewed and get any other questions answered.

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