Everything You Need to Know About Rent to Own Agreements

March 6, 2017 by Natalie Calvo | Contracts, Real Estate, Rent to Own

Drop the pen. Do not sign off on a rent to own contract until you've checked off everything on this list.

You understand rent to own, you found the perfect house and the owner wants to give you the lease option. You’re ready to move forward with the deal, but, wait. As you know, it is a big decision to begin leasing to own and over time you will invest a lot of money in the eventual purchase of the home. It’s important to make sure that you are protected, legally. A contract is a great way to ensure that the premiums you are paying each month will go towards your down payment. It also ensures that you are truly given the first option to buy the home.

What Should Go in the Lease to Own Contact?

This rent to own agreement sample is a good start to creating your lease to own contract.

While every lease to own contract is unique, all lease to own contracts should include these basic elements:

  • Purchase Price
  • Standard Rent
  • Maintenance and Other Fees
  • Option Deposit
  • Rent Premium

Download this pdf checklist to make sure your contract includes the most important elements.

Purchase Price

You and the seller will agree on the price for the home based on its future fair market value. Regardless of what the fair market value truly is on the date of purchase, you will pay the fair market value. A local mortgage banker will be able to help you come up with a good estimate for the future fair market value.

It’s also important to make sure the contract specifies whether you’re required to purchase the home at the end of the contract if you can’t afford it at the end of the contract. You want to make sure your rent to own contract legally protects you from lawsuits if you don’t purchase the home.

Standard Rent

Base your rent on on the fair market rent for the property. Look at the rental price for similar properties in the area to make sure that you’re paying an accurate amount for the property. It is also a wise idea to consult with a mortgage banker about the property’s rent.

The rent to own agreement should specify when your payments are due each month. It’s important to have written confirmation in the lease to own contract about what dates you will be paying rent. Make sure to stick to these dates of payment to avoid nullifying the contract.

How much of the payment is going toward rent and how much is going towards your down payment? Make sure that your contract includes the exact amount. Your premium payments should align with the length of time and amount of money you need to save up for your down payment.

Maintenance and Other Fees

Technically speaking, in a rent to own scenario, you act as the owner of the home. While you don’t have the deed in hand, you still have to make and pay for repairs to the property. However, the situation isn’t entirely black and white. The owner might still pay for insurance and taxes on the home. It’s important to have these details in the contract before you sign a lease to own contract.

Typically, the owner pays for property taxes and insurance and the renter pays for maintenance charges, utilities and property fees. Ensure that your contract specifies who exactly pays what to avoid confusion.

Option Deposit

Option fees are a required part of rent to own agreements. The deposit guarantees you the right to purchase the home in the future. It is a non-refundable fee and is usually between 2 percent and 10 percent of the price of the home. It will be credited towards the down payment of the home should you purchase it.

At any point during the lease, if you are qualified, you can use the option fee and your rent premiums to purchase the home. The contract should state the amount of the option fee, where the money will be kept and how you can access it to purchase the home.

Rent Premiums

The rent premium is a percentage of your monthly rent price that goes toward the down payment of the home. You will pay more per month for rent than you would for a normal rental property; however, the seller gives that money back to you as a credit towards the home purchase.

If you choose to purchase the home, the entire rent premium goes toward your down payment. If you choose not to purchase the home, the seller keeps all premium payments.

What Questions Should I Ask a Real Estate Lawyer About the Contract?

There are certain precautions you should take to protect your rights before signing a rent to own agreement form. It’s always a good idea to have a real estate lawyer look over the contract before you sign. The real estate lawyer may suggest valuable revisions to the contract.

Have you asked the lawyer these rent to own agreement questions? You will feel a lot safer about signing your lease to own contract if you do!

1. Can I assign my option rights to someone else?

Assigning option rights means at a later date you can assign the option to someone else and charge them for the down payment that you paid. Option fees that are assignable, sellable or transferable work that way.

So, if for some reason you decide you don’t want to purchase the home, at any point throughout the lease, and you want to move somewhere else, you don’t lose your money. You can sell your position in the contract to someone else and recover all of the money you spent. That person would pay you for your spot and continue to make payments to the owner. At the end of the contract, that person has the option to buy the home. If you choose to do this, you would no longer have the first option to buy the home at the end of the contract. If this sounds like a possibility to you, ask your lawyer to include something about it in the contract.

2. Does the entire premium price go toward my future down payment?

Make sure that the seller isn’t overcharging you. Your full payment equals the fair market value rent plus the premium that gets put into escrow. If you’re paying more, call the owner out on it before buying the property and find out why you’re being overcharged.

For example:

The fair market rent is equal to $600. $50 of what you pay each month is being put into escrow. You should be paying the seller $650 per month.

3. Are there any liens or claims against the home? Is the home collateral for anything?

Basically, do your due diligence to make sure the seller does not pass any debt onto the house that ends up passed on to you if you choose to buy. Ask the seller, but take what he or she says with a grain of salt. Visit a public records office to look up the history of the financial records for the home and to perform an unofficial background check on the seller.

An unpaid contractor or employee can place a lien on the owner’s home. The amount the owner owes is passed on to the house until the owner pays off the debt. While the owner SHOULD pay it off when he or she sells you the home, you want to make sure to have it in your contract. It’s a possibility that the owner doesn’t even know about the lien on his or her home. For that reason, make sure to go the extra mile beyond what the seller says to research this question.

Did the owner put the house up for collateral to buy another property or to secure financing for something else? Include something about it in the contract. Be wary that the owner could foreclose on the home if, for some reason, he or she doesn’t make the payments on the collateral financing. Also, make sure that if you buy the home, the home is no longer collateral for that financing. Ask your lawyer to include something about the collateral in the contract. You don’t want to risk losing the home once you’ve bought it because of the previous owner’s debt.

For other potential hazards to look out to, check out 5 ways to spot a rent to own scam.

4. Does the Seller Have a Mortgage on the Home?

Finding out about the owner’s mortgage payments will help keep you secure. Be sure you will be able to live in the home for at least the time specified in your lease. The owner may not be able to pay off the mortgage every month and could foreclose on the home if the mortgage payment is higher than your rental payment.

While this would be a scenario where you would probably get excess payment back, you wouldn’t be able to purchase the home, and you wouldn’t be able to live there for as long as you expected. It won’t directly hurt you, but moving and looking for a new place to live takes time and effort. Especially if you’re looking for another rent to own property, which are rarer. Moving costs are also expensive, and you may have to take time off from work. If the reason you are renting to own is to improve your credit, the owner foreclosing could have unintended repercussions for you.

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