The Ins and Outs of a Rent-To-Own Contract
What if your dream home is on the market, but you can’t afford it yet? A rent-to-own contract is a legal document you definitely want to consider in that scenario.
A rent-to-own contract may be a perfect option for an aspiring homeowner, and it has many benefits for the potential property seller as well.
What Is a Rent-To-Own Agreement?
If you’ve ever dealt with lease agreements, you won’t find rent-to-own ones difficult to grasp.
A rent-to-own agreement is a legal document between a potential home buyer and a home seller.
The biggest appeal of the contract for buyers is that they can rent a home they may want to buy one day right away. By paying rent for a specified amount of time—usually several years—they get to decide whether they want to buy a home at one point in the future.
The landlords, or the home sellers, enter into a rent-to-own contract because it brings them a steady influx of rent payments.
The price of the property can be determined upon signing the rent-to-own agreement or at a later time. Buyers are usually looking to set a specific price right away, while sellers don’t want to agree upon the price beforehand as the market value can change in their favor.
How Do Rent-To-Own Contracts Differ From Lease Agreements?
Rent-to-own contracts are similar to lease agreements, but they have several important elements that the lease agreements don’t include.
A typical lease agreement consists of these elements:
- The names of the tenants and landlords
- Property description
- Rent amount
- Due dates
- Late fees repercussions
- Grace periods
- Duration of the lease
A rent-to-own contract details all the same information as the lease agreement, but it also includes the:
- Purchase price—A rent-to-own contract specifies when the price of the home is going to be set and how. The price can be agreed upon when the contract is signed between the two parties or when it expires
- Option fee—Buyers have to pay an option fee to the sellers. This fee buys them an option to purchase the property one day, and it is nonrefundable
- Rent premium—If both parties agree, a portion of the rent paid over the years can count toward the final purchase price. This gives buyers the option to accumulate credit while they are tenants, but it also allows sellers to increase the price of rent
- Breach of contract terms—A rent-to-own contract must include the details about what happens when the contract is breached and what each of the party’s responsibility to another is
Rent-To-Own Home Contracts—Is Your Contract Lease-Purchase or Lease-Option?
When writing contracts, but especially when signing them, you must know what your options are.
Rent-to-own contracts can be lease-option and lease-purchase contracts, and the two differ fundamentally. If you, as a buyer, sign a lease-option contract, you have the option to buy the home one day. The same is not the case with lease-purchase contracts. If you sign a lease-purchase contract, you must buy the home before or when the term expires.
What Do Buyers Gain by Signing a Lease-To-Own Agreement?
Both tenants and landlords can benefit from signing a rent-to-own contract.
Here are the pros and cons for the buyer:
|Buyer’s Advantages||Buyer’s Disadvantages|
Rent-To-Own Agreements—What’s in It for the Seller?
Sellers have a lot to gain by entering into a rent-to-own contract. Check out what the landlords’ benefits and potential drawbacks are when they sign the agreement:
|Seller’s Advantages||Seller’s Disadvantages|
Pro Tips for Reviewing Rent-To-Own Lease Agreements
If you are considering signing a rent-to-own lease agreement, as a buyer, you should:
- Review the contract to check whether it’s a lease-option or a lease-purchase agreement
- Agree with the seller what maintenance obligations will fall on you
- Check how you can exercise your option to buy
- Research the property and its owners as some can be scammers
- Double-check the contract to see whether you agree with the terms
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