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First, the buyer/tenant and the seller decide on a home purchase price. Then the parties set up an Option Agreement, which outlines the fee the buyer pays the seller for the option to buy the home at a future date. Then, the tenant/buyer signs a Lease Agreement which outlines the terms of the lease period. The Lease or Rental Agreement will spell out the monthly rent payments; and what portion is credited toward the future purchase price. These credits are used toward the purchase down payment. The buyer/tenant moves in to the home, making monthly rent payments and accumulating Option Credits. At the end of the lease period, the renter obtains financing to execute a Sales Contract to buy the home.
An Option Credit is the portion of the total monthly rent paid that is applied to the final home purchase. For example, if a monthly rent payment is $1500 and Option Credits accrue at $500 per month, then, over a 36 month lease, the renter will accumulate $18,000 in payment credit that can be deducted off the purchase price, or used toward the down payment, if the renter opts to purchase the home.
The Option Fee is a payment from the Buyer/tenant to the seller, before the tenant moves in. This fee amount is negotiable. The Option Fee gives the buyer/tenant the exclusive right to choose to purchase the home at the end of the lease period. The seller may not sell the home to another party during the Option period, and the renter may ultimately opt out, or not buy the home, however in that case the Option Fee is usually forfeited to the seller.
The owner/seller is usually required to maintain full insurance and pay all property taxes and other fees, such as HOA (home owner association) dues as necessary.
There are three components to a rent to own. These are often spelled out in individual agreements, called the Rental Agreement (which outlines the terms for leasing and occupying the home, plus the rental rate and Option Credit accrued from the rent), the Option Agreement (which details the payment amount the renter must make to secure the option to buy the home after the lease ends), and a Sales Contract (to specify all terms of sale, including but not limited to the sales price, title, financing and seller or buyer obligations).
The buyers find rent to own attractive include:
The answer is usually no. The lease option should allow the buyer the option to leave after the lease is over.
The Option Fee and any Credits earned or accumulated are typically non-refundable if the buyer does not purchase the home. The fee and credits act as incentives for the buyer to complete the purchase, and protect the buyer by maintaining exclusive access to the home purchase.
Many rent to own agreements feature a provision that sets aside a fraction of the monthly rental payments as credit toward the purchase price of the residence. This amount varies from situation to situation, yet it may be as great as up to 50 percent of the rental payment. This provides homebuyers with the benefit of creating equity while renting.
2 to 5 years are typical. It often takes more than a year to clean up your credit, accumulate sufficient option credits, and position yourself to buy a home.
Usually, you may but, it probably would come at an extra cost, to extend the option period.
Often, it’s set up so that the tenant-buyer is responsible for minor repairs, with the owner responsible for the larger concerns.
This is negotiated. You do want to make sure at the end of the term there is a sufficient amount going towards the down payment.
Also negotiable. Often, it’s the equivalent of 2-4 month’s rent
You lose them in most cases. Almost all lease-options are written so that the tenant-buyer forfeits any option fees and credits if he/she doesn’t exercise the option.
Yes. As with any real estate transaction or major purchase you should have an attorney review the documents
