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Making 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 names, and the number of years the lease will last. But a Rent-to-Own 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. When ready, you can tap or click the button labeled "Make document" to take a closer look at the sample Rent-to-Own Contract and see what information you'll need to build your document.
The best approach when you lease-to-own a home is to get your agreement in writing. In its most basic form, a Rent-to-Own Agreement is similar to a typical rental agreement, except that you pay a slightly higher amount in rent each month and a portion of that goes towards the purchase price. At the end of the lease period, you have the option to purchase the home based on the terms that were agreed to in the contract. In some agreements, you may be responsible for maintaining the property during the lease, unlike ordinary rental agreements where the landlord is responsible for repairs and maintenance. Rent-to-Own Agreements are not all the same, so you may want to speak to an attorney if you have any questions.
There are advantages and disadvantages for both buyers and sellers in a Rent-to-Own situation. The two sides of a Rent-to-Own Agreement include the potential buyer(s) 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 long-term and steady rent 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, are 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 buyers are working on improving their credit and don't have a down payment, a Rent-to-Own Agreement gives them enough time to raise their credit score, pay off debt, and make payments towards a down payment. If a sale price is agreed upon, the buyers are 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 buyers will not be prepared to make the purchase at the end of the lease period. The potential buyers may lose their jobs, experience an illness, or simply won't be able to pay down debt. And in the end, the investment paid towards the option fee and extra rent paid will be lost.
Scams are also a legitimate concern, and all buyers should ensure that the agreement they are considering is legitimate and enforceable.
In addition to these factors, there are other things that can go wrong with Rent-to-Own Agreements. To protect your interests, here are a few potential issues that you should be aware of:
- Property owner doesn't pay their mortgage or taxes and could lose the property.
- Renter doesn't maintain the property well.
- Eager buyers get duped by a lease-to-purchase scam.
- While living in the property, renter finds flaws in the home that make them want to back out.
- Contract is terminated if rent is paid late and the renters lose their investment.
- Sellers might try to sabotage the agreement, so they can sell their property for a higher amount.
Rent-to-Own Agreements should be carefully reviewed before signing. They are expensive, long-term agreements, so it warrants diligent review. If everything goes well, renters can build their credit while the seller can benefit from two or three years of rental income during the lease period. At the end of the contract, in a best-case scenario, the seller sells a hard-to-sell property and the new owners get to enjoy the benefits of homeownership. If you are considering entering into a lease-option arrangement, it is important to talk to a lawyer.
A Rent-to-Own Agreement includes many of the same terms as a standard Lease Agreement, since it doubles as a rental agreement with an added option to purchase. Commonly included terms include:
- The location and description of the property.
- The full name of each tenant.
- What kind of utilities or amenities are included.
- The amount of rent and security deposit.
- How payment should be made.
The Rent-to-Own Agreement also includes details about the purchase, including:
Option fee - This fee is usually one to five percent of the price of the home. In most contracts, this fee is to reserve the "option" to buy the property and may go towards the down payment or equity.
Additional rent - Most contracts set the rent rate two or three hundred dollars higher per month than the going rate. So, if a home usually rents for $1200 per month, the rent might be set at $1500. The extra $300 is put towards the down payment or treated as "equity" and taken off the price of the home.
Termination - This portion of the contract is extremely important for both parties. It details how a renter might violate their lease, how a renter can quit the lease, and what the landlord's obligations are in such circumstances.
Home sale price - Some sellers and buyers agree on what the sale price will be when making the agreement. It could be current market value or the projected value. Some choose not to set the price until the time the actual purchase is to take place.
Your contract will also contain the typical legal language around smoking, late fees, invited guests, animals, and property damage. As you make your Lease Option Contract, you also will have the ability to add information about maintenance procedures, furnishings, and insurance requirements. Further modifications are allowed, as necessary.
In its most basic form, a Rent to Own Agreement is similar to a typical rental agreement, except that you pay a slightly higher amount in rent each month and a portion of that goes towards the purchase price. At the end of the lease period, you have the option to purchase the home based on the terms that were agreed to in the contract. In some agreements, you may be responsible for maintaining the property during the lease, unlike ordinary rental agreements where the landlord is responsible for repairs and maintenance. Rent to Own Agreements are not all the same, so you may want to speak to an attorney if you have any questions.
As with any contract, a Rent-to-Own Contract is not legally binding until it is signed by the landlord and tenant(s). Unlike a rent-to-own contract template or blank PDF file that you might download elsewhere, every rental contract from Rocket Lawyer comes with the option of Document Defense®, so an On Call attorney can review the situation and take action if you need to demand payment or experience any other issue.
The cost of finding and working with a law firm might cost anywhere from hundreds of dollars to thousands. With Rocket Lawyer, every Rent-to-Own Agreement that you create will be tailored to you. Simply tap or click the button that says "Make document" to get started. If you'd like, you may also try having your drafted document looked over by a Rocket Lawyer On Call® attorney after making it.
After creating a Lease-to-Own Agreement with Rocket Lawyer, you will be able to review it wherever and whenever you choose. You also may try any of the following actions related to your contract: making edits, printing it, getting electronic signatures via RocketSign®, or saving it as a Word or PDF document. Your Rent-to-Own Agreement will come with its own series of tips on what comes next after your document is finished. The tenant should receive a copy of the final contract. You may also wish to explore our entire repository of contracts and other documents for property owners and managers.
This happens often. A lot can change within a 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.
Contract terms vary, but in most cases the seller keeps the option fee. Extra rent is usually handled 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 spelled out in the Rent-to-Own Agreement. Either way, if the potential buyer backs out, the money goes to the seller.
Most Rent-to-Own Agreements are made "in good faith" that both parties are going to fulfill 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 discovers property flaws not seen before living there long-term.
- Buyer 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-Own 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.