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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.
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, an Option to Buy 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.
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: monthly payments, due dates, grace periods, late fees, etc. The Rent to Own Agreement also includes details about the purchase, including: the option fee, what proportion of the rent goes towards the purchase, the terms for violating the agreement, and the manner in which the purchase price will be determined (if it is not explicitly set out in the agreement).
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.
You can use the Rocket Lawyer Rent to Own Agreement, which is the same as a Lease to Own contract, if:
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 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 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 fulfil their side of the contract and that everything will go well. But sometimes bad things happen.
Some things to watch for include:
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.