How Long Should Your Rent to Own Lease Term Be?

March 16, 2018 by Marty Orefice | Real Estate, Rent to Own

Setting the right term length is an important part of the lease-option negotiation process.

When you sign your rent to own contract, you set a lease term. Your lease term is your deadline. If you haven’t purchased the property by the end of it, the seller has the right to sell the property to someone else and keep your option fee.

The lease term is usually around 2 or 3 years, but it could be longer or shorter. A shorter lease term is better for the seller, while a longer lease term is better for the buyer.

Which lease length do you choose?

Your entire rent to own contract is going to be a negotiation process. Your lease term is one of the pawns in that negotiation.

A lease term that is 2 or 3 years long is ideal. It’s soon enough that the seller can visualize the end, but long enough to allow the buyer time to get everything ready for the mortgage application, like building a job history. It also affords the seller the opportunity to earn some money from rent before selling the property at the end.

It is in your interest to have a longer lease term because it allows you some wiggle room to hit hiccups along the way. For example, if an emergency comes up and you need to use some of the money you saved for a down payment on fixing your car or paying a medical expense, you’ll have some more time to come up with that money.

You typically want to set closing for at least 6 months after you think you will be ready to close. Six months is a decent amount of wiggle room.

The Issue with Long Lease Terms

Additionally, an extra long lease term can never hurt you because you can always close early. As soon as you’re ready to buy, you should close. That way none of the hiccups that could affect your mortgage approval get in the way of you owning your dream home.

It’s in the seller’s interest to sell the property as soon as possible so that they can earn the large lump sum of money that comes from the sale.

Knowing the seller is motivated to close early can help you in other areas of the negotiation process. For example, if you know you can close sooner than the typical 2 or 3 years you can use that as a bargaining chip to decrease the amount of the option fee or rent.

By the same token, if you need a longer lease term you can use your option fee or rent as a bargaining chip. Mind you, the better bargaining chip is your option fee because if you close you’ll get that back, but the seller will be happier if you increase your rent payment, which you won’t get back. Offering more money on your option fee or rent can give the seller reassurance that you’re motivated to buy and consolation if you don’t buy because they kept a significant amount of money.

Christian Patterson Rental Property by Visitor7 is licensed under CC BY-SA 3.0.

Marty Orefice

About The Author

Marty Orefice

Martin Orefice is a real estate investor who has been in the industry for over a decade. He has experience with rent to own deals from all sides—as a buyer, seller and investor. He created to provide the #1 resource where people can find information about all things rent to own.

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