The Inside Scoop on Rent-to-Own Agreements

What is a rent-to-own agreement? 

• A rent-to-own agreement is a contract between a property owner and a renter in which a renter agrees to rent the property for a predetermined amount of time, usually 1-3 years. The renter pays an above-market rate and allocates excess rent towards a down payment.  At the end of this time period, the renter purchases the home at the price stated in the contract.  

Who do they benefit?

• Rent-to-own leases can benefit both homeowners and renters. They are great for sellers who are eager to move out but have yet to sell their home.  Similarly, they benefit renters who are equally as eager to buy a home but lack financial preparedness. For example, renters may need additional time to save for a down-payment, improve their credit score, or pay off debt. Rent-to-own agreements allow renters to secure and settle into the home they want before having to actually but it. 

When is it a bad idea?

• Renters who are not positive they want to remain in their rental should be wary of rent-to-own agreements. Because renters pay above-market rent in such contracts, it may be more practical to simply rent a home rather than sign a rent-to-own agreement. This is less expensive and offers the renter more flexibility when looking for a home after their lease is up. 

What should rent-to-own agreements include?

• An attorney should be hired to draft a rent-to-own agreement. It's also advisable to consult a lender. Generally speaking, a rent-to-own lease should specify the following information:
• Length of the lease period.
• Rental rate.
• Rent credit for down payment and how it will be held until the time of purchase.
• Who will pay for maintainance, repairs, utilities, property taxes, insurance, and homeowner fees during the lease period.
• When the title is transferred to the renter.
• What happens if home values rise or fall between the time the contract is signed and the time of purchase. 
• Who is responsible if something happens to the property during the rental period. 

Finally, I recommend that renters have a home inspection before buying any property, even if they have been living in it. Interested in renting or buying a home? Contact me.