The “Rent to Own” Process

Why would anyone do a “rent to own” agreement? This process can be a way for people with limited savings or with questionable credit scores to buy a home. This type of agreement allows for the opportunity to save for a down payment. If there are credit challenges, this process can buy some time in the home before having to qualify for a mortgage.

In the contract, a portion of the rental payments will go toward the home purchase. The contract will stipulate what the price of the home will be when the lease ends. At the end of the lease, the renter acquires a mortgage for the property and finalizes the sale.

State laws vary on rent-to-own contracts, but typically, the deals can be set up any way the buyer/tenant and seller/landlord prefer. Both parties must agree on the purchase price, which can be tricky when the sale is happening several years in the future. In a rising market, for example, the seller might want the buyer to pay more than the current value of the property.

There are two types of agreements:

• A rent-to-own contract also called a lease purchase, refers to the contract where the buyer is legally obligated to purchase the property at the end of the lease.
• A lease with the option to purchase also called a lease option, gives the buyer the right to buy the property at the end of their lease term. In other words, the buyer is not contractually obligated to purchase the home.

The terms rent-to-own and option to purchase are sometimes used interchangeably so both the seller and the buyer should be clear about the nature of the contract before signing it. In particular, the buyer should be aware of the terms and conditions so they do not mistakenly agree to buy the home when the lease ends.

Until the tenant exercises the option and purchases the rental property, the premises are owned by the landlord.  The title to the house remains with the landlord until the tenant exercises the option and purchases the property.

It’s often advised to consult with a real estate attorney to clearly define the details such as when rent is due; how much of the rent will go toward the purchase; who takes care of any repairs and the general upkeep of the home during the lease period and so forth. Once the best terms have been reached for both parties an inspection should be conducted with an arrangement of payment by the landlord. An inspection will single out any major issues that could end up being a big expense going forward as well as a way to protect the person leasing from any claims of damage if the intention is not to buy at the end of the contract.

The Bottom Line: Renting to own may be a great option for people that want to own but have a poor credit score or don’t have the money for a down payment. Additionally, this might be the best option for a seller in a market that isn’t doing very well. There are plenty of pros and cons that come with this process, so it’s in the best interest of everyone to consult with a real estate attorney as well as a realtor to help make this decision.