What Goes Into So-Called “Rent-To-Own” Contracts For A Home Purchase?

by | July 5, 2018

Home ownership is an integral part of the American dream, but it can be a hard goal to achieve. Between insufficient savings to have a down payment, marginal credit scores and nontraditional employment, obtaining a mortgage can be a real challenge, and some people who want to buy a home simply aren’t ready for a variety of personal reasons. If you’re a person who is in any of these categories but there is a home that you’re interested in purchasing in the future, a rent-to-own contract might be the right answer for you.

A rent-to-own contract is an agreement that is a standard lease agreement that has an additional clause (and fees) to make way for a purchase at the end of the contract. Though these types of contracts can provide an excellent option when you’re not immediately ready or able to buy, there are also potential legal pitfalls. Here’s what you need to know about what goes into a rent-to-own contract, and why you’d be smart to ask an attorney for assistance before going all in.

What’s included:

  • Option money – When the buyer agrees to a rent-to-own contract, they’re agreeing to hold the house for you instead of selling it immediately. In exchange, the lessee will need to pay an option fee. This is usually nonrefundable and may or may not be negotiable. In many cases, the option fee can be applied to the purchase if it occurs.
  • Purchase price – Rent to own contracts cite the price for which the home can be purchased at the contract’s end. The price is usually higher than the current market value, especially if home prices are increasing. Though this represents a bigger investment than the buyer would pay if they purchased immediately, it also has the advantage of locking in a price that may end up lower than the comps at the lease’s end.
  • Rent price – A rent-to-own contract can establish a portion of each month’s rent as being credited toward the purchase if it occurs. This has the advantage of boosting equity in the home.

What are the risks?

Though rent-to-own contracts offer great potential, they also carry great risk unless you have a legal expert watching out for your best interests. One of the biggest potential pitfalls is that renters may believe that the contracts were written giving them the option to buy at the end, when in fact they were written as lease/purchase agreements that leave them legally obligated to purchase the home. Many times, a rent-to-own contract will have non-standard terms in its lease portion, including making the renter responsible for more extensive maintenance costs.

The best way to protect yourself against these unforeseen outcomes is to hire a qualified real estate attorney to help you review the contract and make sure that your rights are protected, and you understand all your obligations. Legalty offers low-cost set fees to offer you the help you need and the peace of mind that you want. Give us a call today.