What is Rent-To-Own?
Rent-To-Own is an agreement between a landlord and a tenant which enables a tenant to purchase the property at the end of the lease. There are two types of Rent-To-Own contracts. A Rent-To-Own Lease will require the Tenant to Purchase the property at the end of the lease; while, a Rent-To-Own Option will give the Tenant the Option to purchase the property at the end of the lease.
Advantages to the Tenant/Buyer
If the tenant has poor credit or lacks a down payment, rent-to-own gives the tenant the ability to repair their credit or save for a downpayment while building equity in a property they will own in the future.
Advantages to the Landlord/Seller
If a seller has had difficulty selling the property while it is on the market, rent-to-own gives the seller the ability to secure a tenant for the property who will purchase the property at a future date. The seller is able to make income during the time frame and have a known buyer for the property who has a vested interest in not damaging the property.
Beware of These Issues
Both the Tenant/Buyer and the Landlord/Seller must be aware of many issues and must take steps to assure that persons on the other side are both trustworthy and financially able to follow through with the contract. The Tenant/Buyer must have good enough credit that it can be improved during the timeframe of the rent-to-own contract, if that was the issue for executing a rent-to-own contract. Could the Tenant/Buyer have difficulty qualifying for a mortgage for such things as non-traditional income source, or contract workers, or even foreign nationals? The Landlord/Seller must hold a clear title to the property so that the property will be able to be sold at the end of the lease.
Background checks, credit reports and a title search should be executed and a Real Estate Attorney or other Real Estate Professional should be involved in the creation of the rent-to-own contract. The Tenant/Buyer should speak with a lender before entering into a contract to determine if any problems might exist and to determine how much of a mortgage they will qualify for and how much of a down payment they will need at the time of purchase. The Tenant/Buyer should perform their own inspection of the home or hire someone to do this so that they is aware of any problems that exist in the home. The Tenant/Buyer should have researched the local neighborhood and its location in relation to the services, schools, churches and public transportation and know that they want to live in this community.
Rent-To-Own Contract Decision Points
The Tenant/Buyer and the Landlord Seller must come to agreement of many points of the contract.
- The Purchase Price of the Property at the end date of the rental. How does this price compare to other similar homes?
- Whether there is an option to purchase the property or a requirement to purchase the property at the end of the rental term.
- The beginning and end dates for the rental, the date for having a mortgage commitment and settlement date.
- Is there an Option Fee to secure the property for the timeframe and, if so, how much is applied toward the purchase price.
- What is the monthly rent and how much is applied toward the purchase price.
- Are pets allowed, and, if so, are there limits or breed restrictions.
- Both parties must retain insurance on the property and provide documentation.
- How to exercise the offer/requirement to buy at the end of the rental.
- Can the purchase date by moved forward to take advantage of more beneficial mortgage rates, etc.
- Who is responsible for payment of utilities, property taxes, HOA dues, landscaping, grass cutting and snow removal?
- Who is responsible for maintenance and or major repairs during the time of the rental or are some costs split?
- How the Tenant/Buyer can lose the option/requirement to purchase the property (such as a late rent payment)?
- What happens if any party dies during the term of the contract.
- If there is an option to purchase the property and not a requirement, what happens to any fees and monthly rent additions?
Executing the Rent-To- Own Contract and the Sale of the Property
Follow the laws of your state and hire a real estate attorney or other real estate professional as is common in your state to create both the Rent-To-Own Contract based on the agreed upon decision points and the Agreement of Sale for the Property.