A Rent-to-Own Agreement, also known as lease-to-own, is a written document between the landlord or potential seller who owns the rental property and the tenant or potential buyer leasing the property.
What is a Rent-to-Own Agreement?
Rent-to-own agreements detail 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.
As a reference, a rent-to-own agreement is known by other names:
- Rent-to-Own Contract
- Lease Option Agreement
- Lease-to-Own Agreement
- Lease with the Option to Purchase Agreement
- Lease Purchase Contract
- Option to Purchase Agreement
- Contract-to-Deed Agreement
Option to Purchase
The tenant’s option to purchase comes at a price. Tenants who want to take advantage of an option to purchase have to pay the landlord “option money” or “option consideration” or premium.
This consideration can be a set amount paid upfront – typically between 1% and 5% of the purchase price- or a portion of the monthly rent payments as noted in the lease agreement portion of the rental contract.
While the option consideration or fee or any premium is generally non-refundable, a tenant can usually apply it as a credit to the purchase price if exercising the option to purchase and may sometimes credit it to the down payment.
Rent-to-Own Agreement Example
The sample rent-to-own agreement below details a contract between the landlord, ‘Casey S Silverman’, and the tenant, ‘Sophia M Cargill.’
Casey S Silverman agrees to lease the property to Sophia M Cargill with the option to purchase it at an agreed-upon price.
Types Of Rent-to-Own Contracts
There are two main types of rent-to-own agreements:
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, it is more friendly and flexible for tenants. At the end of the lease agreement term, if the tenant decides not to buy the property, they can simply stop paying rent and walk away.
In a lease-purchase agreement, the tenant is bound to buy the rental property unless there is a breach of contract or they cannot secure a mortgage due to insufficient downpayment, credit, or other criteria.
Unlike the lease option, where the tenant can decide not to buy, the tenant in a lease-purchase agreement does not have the choice. In a lease-purchase agreement, the landlord and the tenant are bound to sell and buy, respectively.
How Does Rent-to-Own Work?
Rent-to-own agreements are a bit more complex than lease agreements or real estate purchase agreements.
The rent-to-own agreement form is more of a hybrid of a lease agreement and a real estate purchase agreement. The process is more complicated than a standard lease agreement and carries consequences if there is an error.
Here is how it works:
Step 1: Sign One of Two Types of 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 one 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 2: Negotiate a Purchase Price
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 as it may enable them to lock in a lower price in a property market that is on the rise and plan for their down payment.
Step 3: Pay a Non-Refundable Option Fee
In a rent-to-own or lease-to-own agreement, the tenant pays the landlord a non-refundable fee, an option consideration.
This fee is usually paid once and allows the tenant to buy the property later.
There is no standard rate, so the fee is negotiable. But, it is generally between 1% and 5% of the purchase price.
Step 4: Negotiate if Your Rent Payments Go Toward the Principal Value of the Home
It is customary in rent-to-own agreements to apply a portion of the tenant’s rent payments to the purchase price. Your rent is usually higher than the market rate.
So, you can negotiate that the excess goes towards paying the home’s purchase price.
Step 5: Define Maintenance Role
Define the landlord and tenant’s maintenance responsibilities.
Who will be responsible for maintaining the property and bearing the repair costs?
Parties should decide on their roles in the rent-to-lease contract.
Step 6: Agree on the Rental Term and Type of Lease-to-Own Contract
We mentioned earlier that there are two lease-to-own agreements.
Parties should decide whether to enter into a lease option or a lease purchase.
Step 7: Secure a Mortgage
The tenant may need to apply for and secure a mortgage at the end of the lease so they can exercise their option to buy.
Step 8: Read Your Contract Carefully and Get a Home Inspection
Read the contract line by line, or get a real estate lawyer to help you review the agreement to ensure you are adequately protected.
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 address and legal description of the property
- Rent Payments: The amount of the monthly rent payments and any late fees
- Rent Term: The beginning and end dates of the lease term
- Security Deposit: The amount of the security deposit, if any, and details on returning the security deposit after the end of the lease term
- Option to Purchase: A specific grant to the tenant of an option to purchase the property
- Option Consideration: The amount the tenant is paying for the option to buy the property
- Purchase Price: The purchase price to buy the property
- Notice of Option: The tenant must give notice of intent to purchase to the landlord before the option to purchase expires
- Earnest Money Deposit: An optional deposit in addition to the option consideration showing the tenant’s good faith intention to purchase the property
Other details about the lease:
- Use of the Property: How can the tenant use the property?
- Condition of the Property: What kind of condition is the property in, and does anyone need to fix anything?
- Holdover Tenancy: What will happen if the tenant stays on the property past the end of the lease term?
- Utilities: Are any utilities included in the monthly rent?
- Maintenance and Repairs: Is the tenant responsible for any maintenance and repairs?
- Alterations: Can the tenant make any alterations or improvements to the property?
- Smoking: Can the tenant smoke on the property?
- Pets: Are any pets allowed on the property?
- Rules and Regulations: Are there any other specific rules and regulations the tenant must follow?
- Subleasing: Can the tenant sublease or sublet the property?
- Renter’s Insurance: Does the tenant need to carry renter’s insurance?
- Damage to the Property: What happens if the tenant damages the property?
- Surrender of the Property: What happens at the end of the lease term if the tenant does not exercise the option to purchase?
- Default: What happens if the tenant defaults?
Other details about the purchase:
- Property Included in Sale: What personal property and fixtures come with the sale?
- Exclusivity of Option: Is the option to purchase exclusively for the tenant?
- Inspection: Is the buyer purchasing the property “as is”?
- Closing: When will the closing occur?
- Closing Costs: Who will pay what closing costs?
- Title Insurance: Who is responsible for obtaining title insurance?
- Financing: Can the tenant seek financing to cover the purchase price?
- Real Estate Taxes: Who is responsible for real estate taxes?
- Existing Mortgages: Does the seller have to pay off any existing mortgages?
- No Equitable Ownership: Do the rental payments give the tenant any title interest in the property?
Other legal details:
- Disclosures: Include any required federal and state disclosures such as lead paint, mold, and sex offender registry disclosures.
- Notices: Identify when and how the landlord and tenant receive notifications regarding the agreement.
- Severability: State that if one provision is invalid or unenforceable, it will not affect the validity or enforceability of the rest of the agreement.
- Binding Effect: Note that the agreement is binding on the parties and their heirs
- Governing Law: Decide which state’s law controls the agreement.
- Amendments: State that parties can only make changes to the agreement by a written amendment signed by all the parties.
- Disputes: Include how parties resolve disputes – by mediation, arbitration, litigation, or a combination.
- Entire Agreement: Affirm that the agreement is the entire agreement and supersedes all other prior discussions between the parties.
Pros and Cons of Renting to Own
A rent-to-own agreement is appropriate when a tenant wants to rent a property for a set amount of time, usually several years, and then has the option to purchase the property at or before the end of the lease term.
Often, a tenant cannot purchase the property right away for several reasons – because they do not have the money for a down payment, do not have a high enough credit score, cannot get a loan, or are not ready to commit.
And in a slow market, a lease-option arrangement gives a seller more options while receiving a steady income.
While the market for rent-to-own tends to be smaller, it can be a good option for the right seller and buyer.
Below is a list of some of the benefits and drawbacks of this agreement:
Seller’s Pro Seller’s Cons
Higher sales price if market goes down Lower sales price if market goes up
Invested tenants who will take better care of the property Tenant usually gets an exclusive option
Longer rental term with steady income Unable to sell the home during the lease term
Minimal risk and a nonrefundable option fee Chance the seller doesn’t buy the property
No commission needs to be paid to a broker Don’t receive a large lump sum payment
Buyer’s Pros Buyer’s Cons
Lower sales price if market goes up Higher sales price if market goes down
More time to get a loan or improve credit Still might not be able to qualify for a loan
Can purchase a home without a large down payment Will lose the option fee paid if you don’t purchase the home
Can “test out” the home and neighborhood Can lose the option if you fall behind on rent
More likely able to make improvements to the home If the seller forecloses, you lose everything you have put in
Is Lease-to-Own Worth It?
The landlord must determine if lease-to-own is worth it according to their real estate goals.
In summary, consider the following:
For the Landlord — Pros
- It can be a way to earn consistent rental income in a slow housing market
- It can more likely lead to purchase
For the Landlord — Cons
- Loss of income if the value of the house rises later
- The tenant may not buy at the end of the lease
For the Tenant — Pros
- It can be a way to build credit to qualify for a mortgage
- The tenant has more time to save money for a down payment
- The tenant can lock in the purchase price
For the Tenant — Cons
- The tenant may pay a higher purchase price if the value of the house drops
- The tenant may lose the upfront option fee if they do not buy the property
Remember the following when thinking about lease-to-own agreements:
- Tenants/buyers and landlords/sellers may have fewer options for future real estate sales without using a legally binding rent-to-own agreement.
- A landlord might only follow through on an oral promise to sell the property at a specific purchase price at the end of the lease term if there is no lease-to-own agreement.
- A tenant might only promise to pay for maintenance and repairs with a rent-to-own agreement.
- Both parties might have to decide outright between renting or selling the property if they don’t enter into a lease-to-own agreement. And they will not be able to take advantage of the benefits of a rent-to-own agreement.
Here is a list of some possible headaches this agreement might help prevent:
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.
Step 1 – Write Effective Date of Agreement
1. Effective Date. Provide the effective date of the rent-to-own agreement.
Step 2 – Enter Landlord(s)/Seller(s) and Tenant(s)/Buyer(s) Details
2. Landlord(s)/Seller(s). Fill in the full name of the landlord (potential seller). Also, provide the landlord’s address.
3. Tenant(s)/Buyer(s). Fill in the full name of the tenant (potential buyer). Also, provide the tenant’s street address.
Step 3 – Write Property Address and Legal Description
4. Property Address. This is the street (physical) address of the property the tenant is leasing or renting and potentially purchasing. Include any unit or apartment number, if applicable.
5. Legal Description. This is the legal description of the property the landlord is potentially selling. It is a geographical description commonly identified by a government survey, metes and 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
6. Premises. 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 or not parking is included, if the property includes storage and where it is located, and whether or not furnishings are included. You can also add additional details about the property.
Step 5 – Write the Term
7. Term. Enter the start date of the lease. You choose whether the lease is fixed (fixed length of time) or month-to-month (runs until the landlord or tenant terminates it).
Step 6 – Enter Rent Details
8. Rent. Provide the rent amount (calculated monthly), the day rent is due, where the tenant should pay the rent and how, and whether or not the landlord will charge a fee for a returned check or other payment.
9. Proration. State whether or not the landlord will prorate the rent for any period of less than one month.
Step 7 – Describe Guaranty Details.
10. Guaranty. You can choose whether or not you require the tenant 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
11. Late Fees. Share whether or not the landlord will charge a late fee if the tenant does not pay rent by the due date.
Step 9 – Explain Utilities
12. 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
13. Security Deposit – Provide the amount of the security deposit and whether or not the landlord will pay interest on the security deposit. Refer to your state and local laws for guidance.
14. Return of Security Deposit. 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
15. Premises. Document the type of property and how the tenant may use the rental during the lease period.
Step 12 – Identify Inspection Checklist Requirements
16. Inspection Checklist. State whether or not the tenant must complete an inspection checklist. If yes, complete the inspection checklist at the end of the agreement (Exhibit A).
Step 13 – Enter Maintenance and Repairs Details
17. Additional Costs. Write whether or not the tenant is responsible for certain 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
18. Smoking. State whether or not you permit smoking in the property.
Step 15 – Fill In Pet Details
19. Pets. Describe whether or not you allow pets in the property and, if allowed, whether or not the tenant must pay a pet deposit. Enter the description of any pets, if allowed.
Step 16 – Check Assigning and Subletting Option
20. Assigning and Subletting. State whether or not the tenant can assign or sublet the property. If yes, indicate whether or not the tenant needs the landlord’s consent before assigning or subletting.
Step 17 – Identify Lead Disclosure
21. Lead Disclosure. Specify whether the house was built prior to 1978. If yes, the landlord must disclosure the presence of known lead-based paint and lead-based paint hazards present in the property as well as provide any available records and reports pertaining to lead-based paint and lead-based paint hazards in the property. A Detailed disclosure and lead warning statement is attached to the end of this agreement.
Step 18 – Check Military Clause Option
22. Military Clause. State whether or not the tenant may terminate the lease early due to active duty in the U.S. Armed Forces.
Step 19 – Check Renter’s Insurance Option
23. Renter’s Insurance. State whether or not the tenant must obtain a renter’s insurance policy.
Step 20 – Check Mechanic’s Lien Option
24. Mechanic’s Lien. State whether or not 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
25. Default. In the event of a default, the landlord may provide the tenant a written notice of default. Provide the number of days notice if the default is due to the tenant’s failure to timely pay rent. Also, provide the number of days notice required if the default is for something other than failure to timely pay rent.
Step 22 – Enter Option Details
26. 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, specific the price.
27. Option Term. Provide the dates when the option period begins and expires.
28. 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 consideration will be a portion of the monthly rent or a non-refundable upfront fee.
Step 23 – Provide Purchase Deposit Details
29. Purchase Deposit. State whether or not there is an earnest money deposit requirement (and the amount, if so) of the tenant chooses to exercise the option to purchase.
Step 24 – Fill In Personal Property Details
30. Personal Property. 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
31. Payment Method. State the method for the purchase amount to be delivered to the seller at closing.
32. Seller Closing Costs. Choose the closing costs the seller is responsible for. You can also add additional costs.
33. Buyer Closing Costs. Choose the closing costs the buyer is responsible for. You can add additional costs.
34. Buyer Only Closing Costs. Check this box if the buyer is responsible for all closing costs.
Step 26 – Describe Title Details
35. Title Insurance Policy. Choose who pays for the title insurance, who selects the title insurance company, and whether or not you allow exclusions or exceptions to the title insurance policy.
Step 27 – Select Governing State
36. Governing State. Choose the state’s laws that will govern the construction of this purchase agreement.
Step 28 – Check Dispute Option
37. Dispute. Choose whether or not the landlord/seller and tenant/buyer will solve any disputes through court litigation, binding arbitration, mediation, or mediation then arbitration.
Step 29 – Enter Miscellaneous Details
38. Miscellaneous. Include any additional provisions for this rent-to-own agreement.
Rent-to-Own Agreement Sample
Below you can find what a rent-to-own agreement typically looks like: