Terminating a Rent to Own Contract

May 4, 2018 by Marty Orefice | Contracts, Rent to Own

If you're not getting what you were looking for out of the rent to own deal, there are ways you can go about terminating the contract.

There are plenty of reasons why you might want to terminate your rent to own contract. Maybe you’re moving to a different city. Or maybe your financial circumstances have changed. Regardless of your reasoning, you signed a contract, and, now, you’re tasked with getting out of it.

Terminating a Rent to Own Contract

There are a few ways you can go about terminating your rent to own contract. You can walk away from the deal and forfeit the option fee and any premium payments you have made, sublease the property to someone else, start a sandwich lease-option, look for loopholes, negotiate with the seller or sell the property yourself.

Forfeit the Option Fee and Any Premium Payments You Have Made

When you end a rent to own deal without purchasing the property, the seller keeps your option fee and any premium payments you’ve made. That’s fair because the seller has lost a lot of time waiting for you to purchase the property in question.

Your option fee and premium payments were the price you paid to retain the option to purchase the home, and they’re what’s giving you the option not to purchase the property today. However, it can be a tough pill to swallow, especially, if you’re opting out for financial reasons.

Additionally, you’ve agreed to rent the property for a set period of time. Like any other lease, there is probably a fee associated with breaking out of it early. These fees can be substantial as they’re designed to cover the seller’s costs while the property sits empty and they search for new buyers or tenants.

However, if there’s not a predetermined way out of the contract, you may have legal difficulties leaving the lease term early. The seller expected to collect rent from you for a set period of time. So, he or she could take you to court for breaching that agreement, read your lease for specifics or contact a lawyer. You may have to continue to pay rent until the end of the lease term.

I recommend reaching out to the seller. Explain your situation, and you will likely be able to work out an arrangement that pleases all parties.

Sublease the Property to Someone Else

Let’s say you cannot reach an agreement with the seller to stop paying rent early. If you’re willing to take the hit of the option fee and premium payments, ask the seller if he or she is willing to allow you to assign the lease to someone else. If he or she does not approve, maybe it will cause the seller to be more flexible in helping you with other terms.

You can ease any discomfort the seller might have by offering to act as the middleman in a sandwich lease scenario. The new tenant pays rent to you each month and you pay the seller for rent each month. That alleviates any worries the seller has about an unvetted tenant.

If market conditions have substantially changed since you originally signed the lease, you may even make a profit off of what you charge the tenant. However, if market conditions have worsened, you may receive less than what you have to pay the seller. Nonetheless, you’ll be losing less money than you would if you had to pay the full rent price each month.

Enter a Sandwich Lease-Option Arrangement

As explained above, a sandwich lease involves you collecting rent from a third party and then paying the seller. A sandwich lease-option takes that a step further.

When you enter a lease-option sandwich the new buyer would pay you an option fee, preferably of equal value to what you’ve already paid. The new buyer will also pay you rent, of preferably equal value to what you paid the previous seller. The buyer would buy the house from you and you would buy the home from the seller. Just be sure to consult with an attorney to make sure the timeline is straightened out for the deal to play out perfectly.

Like you would in a sandwich lease, you’ll want to consult with the owner of the home to ensure that he or she approves of this option. If he or she does not approve, maybe it will cause the seller to be more flexible in helping you with other terms. Additionally, the seller should feel at ease that he or she does not have to deal with a different tenant because you will be collecting the money from that person and ultimately hold responsibility from his or her actions.

Search for Loopholes

This is a long shot, but if you have an attorney, he or she may be able to find a way for you to walk away from the deal without having to relinquish the option fee or premium payments. Again, this is a long shot, and it’s kind of unfair to the seller, but there is a chance. However, if the seller hired an attorney to make the contract, it’s less likely (hint: always hire an attorney).

Talk to the Seller

Though the seller is entitled to keep the option fee and your premium payments, many sellers feel guilty doing so. Talk to them and maybe you can work out an option that suits both of you.

Sell the Property to Someone Else

One of the most beneficial aspects of rent to own is that you can close whenever you’re ready. If you find another buyer to purchase the home, you can talk to an attorney about organizing the sale appropriately. If you time the closing just right, this can be an excellent way to terminate your contract.

You’ll get to keep the equity you built in the property and terminate the contract with no losses; a decent amount of money saved as premium payments and your option fee; and you may even be able to profit from the sale.

Person Holding Pen in Front of Contract by Rawpixel is licensed under the Pexels Photo License.

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 RentToOwnLabs.com to provide the #1 resource where people can find information about all things rent to own.

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