A rent-to-own lease agreement is a written document between the landlord or potential seller who owns the rental property and the tenant or potential buyer leasing the property. This agreement helps the owner collect rent and gives the tenant a place to stay while they consider buying the property.

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What Is a Rent-to-Own Lease Agreement?
Is Rent-to-Own a Good Idea?
What to Include in a Rent-to-Own Agreement
How Does Rent-to-Own Work for the Seller?
Rent-to-Own Lease Agreement Sample
How to Write a Rent-to-Own Agreement

What Is a Rent-to-Own Lease Agreement?

A rent-to-own lease agreement details the arrangement between the landlord and tenant to lease the rental property while also granting the tenant the option to purchase the property before the end of the lease term.

Since a rent-to-own contract combines elements of a typical lease agreement and a standard real estate purchase agreement, you must include many details to clarify the arrangement’s scope.

Types Of Rent-to-Own Contracts

Explore the two main types of rent-to-own contracts:

1. Lease-Option Agreement

A lease-option agreement gives the tenant the right to purchase the property at the end of the lease, but the tenant can decide not to buy. Because the tenant is not obligated to buy the property, the agreement is more flexible for tenants. At the end of the lease term, if the tenant decides not to buy the property, they can stop paying rent and walk away.

For example, consider Susan, a tenant who enters a lease-option agreement with a landlord for a two-bedroom condo. With one month remaining on her year-long lease, she receives a job offer in a different state. She decides to take it, so she finishes her current lease and relocates to the new state without executing her purchase option.

The tenant’s option to purchase often comes at a price. Tenants wanting to take advantage of an option to purchase may need to pay the landlord “option money” or “option consideration.”

The parties usually set this consideration amount upfront. The amount is typically 1% to 5% of the purchase price or a portion of the monthly rent payments noted in the lease agreement part of the rental contract.

2. Lease-Purchase Agreement

In a lease-purchase agreement, the tenant must buy the rental property unless there is a breach of contract or they can’t secure a mortgage due to insufficient down payment, credit, or other criteria.

Unlike the lease option, where the tenant can decide not to buy, the tenant in a lease-purchase agreement doesn’t have the choice. In a lease-purchase agreement, the landlord and the tenant are bound to sell and buy, respectively.

For example, consider John, a tenant who enters into a lease-purchase agreement with his landlord for a three-bedroom home. He locks in a purchase price and uses the year-long lease period to improve his credit and build equity in the property. At the end of the lease term, he follows through with his commitment to purchase the home.

Is Rent-to-Own a Good Idea?

The rent-to-own process can benefit the involved parties in specific circumstances. Discover the pros and cons of rent-to-own for the buyer and seller so you can understand the advantages and drawbacks from different perspectives:

Higher rent payments (compared to traditional renting)
Less responsibility when maintaining the property
A consistent stream of rental income, which they can use toward a downpayment on another property
Greater ease when finding a willing buyer, as buyers can have the purchase option even if they can’t afford a down payment yet

Interactions with tenants who have poor credit because rent-to-own agreements are more accessible
Missed property appreciation, as the property may increase in value during the lease
No immediate funds to buy another investment property outright, as the payments will not be in a lump sum
Unreliability with the tenant, as the tenant may not follow through with the purchase

The ability to set a firm purchase price, allowing them to potentially buy a house for below-market value
A chance to improve their credit, increasing their chances of qualifying for a loan in the future
The opportunity to live at the property before purchasing it, ensuring they like the building and neighborhood
Lower upfront costs to set themselves on the path to homeownership

The chance they might purchase the property for an inflated price, as the property may depreciate between the time of the original agreement and the time of purchase
Financial losses if they decide not to pursue the purchase, as the owner will keep the rent premium and option fee
The responsibility of property maintenance and repairs, which can make leasing-to-own more expensive than renting
Dependency on the owner, meaning that if the owner has a mortgage and the owner stops paying it, the buyer might lose the property

What to Include in a Rent-to-Own Agreement

Be sure to include all these details when drafting your agreement:

Landlord/Seller: The name and address of the party who owns the property
Tenant/Buyer: The name and address of the party leasing the property and obtaining the option to purchase
Property: The property’s address and legal description
Rent Payments: The amount of the monthly rent payments and any late fees
Rent Term: The beginning and end dates of the lease term
Purchase Price: The purchase price to buy the property
Option to Purchase: A specific grant to the tenant of an option to purchase the property (please clarify if the buyer will require the tenant to purchase after the rental period is over)
Option Consideration: The amount the tenant is paying for the option to buy the property
Security Deposit: The amount of the security deposit, if any, and details on returning the security deposit after the lease term’s end
Earnest Money Deposit: An optional deposit in addition to the option consideration showing the tenant’s good faith intention to purchase the property
Maintenance and Repairs: Whether the tenant will be responsible for any maintenance/repairs
Financing: Clarification on whether the tenant can seek financing to cover the purchase price

How Does Rent-to-Own Work for the Seller?

The rent-to-own agreement form combines a lease agreement and a real estate purchase agreement. The process is more complicated than a standard lease agreement and carries consequences if an error occurs. Here’s how it works:

Step 1 – Assess and Prepare the Property

Assess the property’s condition and market value to know its price range. Start with tools like Zillow, realtor.com, Redfin, US News, ForSalebyOwner, and Chase. Complete renovations and perform repairs as necessary to improve the property’s appeal to potential buyers.

While you can complete the process independently, you may hire a professional stager or real estate agent to help present the property.

Step 2 – Show the Property

Show the property to interested buyers. Depending on how much interest you can generate through advertising, you may schedule private viewings or hold open houses. Emphasize the property’s unique features and benefits and explain the benefits of the rent-to-own arrangement.

Step 3 – Screen Potential Buyers

Verify a potential tenant’s income to ensure they can afford the rent and be reliable tenants through:

Pay Stubs: Request recent pay stubs (usually the last two or three) from the tenant.
Employment Verification Letter: A letter from the tenant’s employer can confirm employment and income.
Tax Returns: Requesting the tenant’s most recent tax return, especially Form W-2 or Form 1099, can be a reliable way to verify annual income.
Bank Statements: Reviewing the tenant’s bank statements can provide a broader view of their financial situation, showing income, spending habits, and financial stability.

You can also ask interested parties to fill out a rental application. Obtain their permission to conduct a background and credit check.

Step 4 – Negotiate the Agreement

Negotiate when and how you will arrive at a purchase price. Parties to rent-to-own agreements may agree to decide on the purchase price at the end of the lease if the buyer wants to exercise their right to purchase.

You can also decide on the purchase price at the outset of the lease, which most buyers prefer because it allows them to lock in a lower price in a rising property market and plan for their down payment.

Be sure to negotiate other terms, including the conditions each party needs to meet, maintenance requirements, rent premium, lease duration, and option fee. You may also decide whether to apply a portion of the tenant’s rent payments to the purchase price.

Step 5 – Sign the Agreement

Standard rent-to-own lease agreements usually consist of two parts: a lease agreement (rental agreement) and an option to purchase. You can either sign the single rent-to-own agreement or sign it as two separate legal documents.

The lease portion in a rent-to-own agreement is like a standard lease agreement between you and your tenant. This rental agreement will have standard lease terms, such as lease duration, rent amount, and rent due date.

The option-to-purchase portion creates the rent-to-own agreement. It gives the tenant the right or option to buy the rental property within an agreed period. The tenant, in turn, pays an option fee and usually a higher rent than the market rate.

Step 6 – Rent and Maintain the Property

Initiate the lease period, ensuring the tenant meets their payment obligations. Follow the maintenance protocols that you outlined in the agreement. If you agree to do some basic upkeep, fulfill your obligations. Remind the tenant of their responsibility to keep the property in good condition.

Step 7 – Close the Sale

Wait for the end of the lease term to approach. Be ready for the tenant to issue a notice that they want to exercise their option to purchase the property.

Facilitate the sale when they’re ready. You may need to coordinate with title companies, legal professionals, and other parties in the closing process. This way, ownership will transfer smoothly.

Step 8 – Allow for Ongoing Communication

Maintain open communication during and after the lease period to address concerns or answer questions.

Inform the tenant if you must make a lease addendum or amendment. Facilitate negotiations to ensure the new additions benefit all parties.

Rent-to-Own Lease Agreement Sample

View our rent-to-own lease agreement template. Download it as a PDF or Word file:

Rent to Own Lease Agreement Template

Download: PDF or Word

How to Write a Rent-to-Own Agreement

Before filling out your rent-to-own agreement, write your state at the top of the form. Then, you can proceed with the following steps:

Step 1 – Write Effective Date of Agreement

Provide the effective date of the rent-to-own agreement.

Step 2 – Enter Landlord(s)/Seller(s) and Tenant(s)/Buyer(s) Details

Fill in the full name of the landlord (potential seller). Also, provide the landlord’s address. Provide the same information for the tenant(s) or potential buyer(s).

Step 3 – Write Property Address and Legal Description

The property address is the street (physical) address of the property the tenant is leasing, renting, or potentially purchasing. If applicable, include any unit or apartment number.

Also, include a legal description of the property the landlord is potentially selling. It’s a geographical description commonly identified by a government survey, metes, sounds, or lot and block. You can find the legal description in the property’s deed or through the county assessor.

Step 4 – Fill in Premises Details

Provide details regarding the property the tenant is leasing and potentially purchasing. Include the type of housing (apartment, house, etc.), number of bedrooms and bathrooms, whether parking is included, if the property includes storage and where it is located, and whether furnishings are included. You can also add additional details about the property.

Step 5 – Write the Term

Enter the start date of the lease. You choose whether the lease is fixed (fixed length) or month-to-month (until the landlord or tenant terminates it).

Step 6 – Enter Rent Details

Provide the rent amount (calculated monthly), the day rent is due, how the tenant should pay the rent, and whether the landlord will charge a fee for a returned check or other payment.

State whether the landlord will prorate the rent for less than one month.

Step 7 – Describe Guaranty Details

You can choose whether you require the tenant to have a guarantor or co-signer. If yes, provide the full name and address of the guarantor or co-signer.

Step 8 – Identify Late Fees

Clarify whether the landlord will charge a late fee if the tenant does not pay rent by the due date.

Step 9 – Explain Utilities

Generally, the tenant is responsible for utilities. However, you can specify if the landlord will be responsible for certain utilities.

Step 10 – Enter Security Deposit Details

Provide the amount of the security deposit and whether the landlord will pay interest on the security deposit. Refer to your state and local laws for guidance.

Provide the number of days after the end of the lease term the landlord has to return the security deposit.

Step 11 – Fill In Use of Premises Information

Document the property type and how the tenant may use the rental during the lease period.

Step 12 – Identify Inspection Checklist Requirements

State whether the tenant must complete an inspection checklist. If yes, complete the inspection checklist at the end of the agreement.

Step 13 – Enter Maintenance and Repair Details

Write whether the tenant is responsible for specific extra maintenance and repair costs, as the tenant has a vested interest in the property with the option to buy.

Step 14 – Describe Smoking Rules

State whether you permit smoking on the property.

Step 15 – Fill In Pet Details

Describe whether you allow pets on the property and, if allowed, whether the tenant must pay a pet deposit. Enter the description of any pets, if allowed.

Step 16 – Check Assigning and Subletting Option

State whether the tenant can assign or sublet the property. If yes, indicate whether the tenant needs the landlord’s consent before assigning or subletting.

Step 17 – Identify Lead Disclosure

Specify whether the house was built before 1978. If yes, the landlord must disclose the presence of known lead-based paint and lead-based paint hazards on the property and provide any available records and reports. A detailed disclosure is attached to the end of this agreement.

Step 18 – Check Military Clause Option

State whether the tenant may terminate the lease early due to active duty in the US Armed Forces.

Step 19 – Check the Renter’s Insurance Option

State whether the tenant must obtain a renter’s insurance policy.

Step 20 – Check the Mechanic’s Lien Option

State whether the landlord (and any service provider) can file a mechanic’s lien on the property if the tenant makes any improvements on the premises and does not pay said service provider.

Step 21 – Fill in Default Details

In the event of a default, the landlord may provide the tenant with a written notice of default. Provide the number of days’ notice if the default is due to the tenant’s failure to pay rent promptly. Also, provide the number of days’ notice required if the default is for something other than failure to pay rent promptly.

Step 22 – Enter Option Details

Here are some option details to include in the agreement:

Option to Purchase. For the option to purchase, state whether or not the landlord/seller and tenant/buyer agree upon a purchase price. If yes, specify the price.
Option Term. Provide the dates when the option period begins and expires.
Option Consideration. In a rent-to-own agreement, the tenant pays consideration in exchange for the exclusive option to purchase the property. Specify if the review will be a portion of the monthly rent or a nonrefundable upfront fee.

Step 23 – Provide Purchase Deposit Details

State whether there’s an earnest money deposit requirement (and the amount, if so) if the tenant chooses to exercise the option to purchase.

Step 24 – Fill in Personal Property Details

The purchase includes all real estate, buildings, improvements, appurtenances, and fixtures. You have an option to include additional personal property items in the sale. If you do so, provide a list of those items included.

Step 25 – Enter Closing and Settlement Information

Here’s some closing and settlement information to include:

Payment Method. State the method for the purchase amount to be delivered to the seller at closing.
Seller Closing Costs. Choose the closing costs for which the seller is responsible. You can add additional costs.
Buyer Closing Costs. Choose the closing costs for which the buyer is responsible. You can add extra costs.
Buyer-Only Closing Costs. Check this box if the buyer is responsible for all closing costs.

Step 26 – Describe Title Details

You can choose who pays for the title insurance, who selects the title insurance company, and whether you allow exclusions or exceptions to the policy.

Step 27 – Select Governing State

Choose the state’s laws that will govern the construction of this purchase agreement.

Step 28 – Check Dispute Option

Choose whether the landlord/seller and tenant/buyer will solve any disputes through court litigation, binding arbitration, mediation, or mediation-arbitration.

Step 29 – Enter Miscellaneous Details

Include any additional provisions for this rent-to-own agreement.

Rent-to-Own Lease Agreement Template