Free Rent-to-Own Agreement

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.

Table of Contents

• Option to Purchase
• How Does Rent-to-Own Work?
• What to Include in a Rent-to-Own Agreement
• Pros and Cons of Renting to Own

Option to Purchase

The tenant’s option to purchase comes at a price. Tenants who want to take advantage of an option to purchase must 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 noted in the lease agreement portion of the rental contract.

While the option consideration of fee or any premium is generally nonrefundable, 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.

How Does Rent-to-Own Work?

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 – 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 because it can let them lock in a lower price in a property market that is on the rise and plan for their down payment.

Step 3 – Verify the Tenant’s Income

Verify a 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.

Step 4 – Pay a Nonrefundable Option Fee

In a rent-to-own agreement, the tenant pays the landlord a nonrefundable fee, an option consideration.

This fee is usually paid once, allowing 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 5 – Negotiate If the Rent Payments Go Toward the Principal Value of the Home

It’s customary in rent-to-own agreements to apply a portion of the tenant’s rent payments to the purchase price. The rent is usually higher than the market rate.

So, the tenant can negotiate that the excess goes towards paying the home’s purchase price.

Step 6 – Define the Maintenance Roles

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 7 – 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 8 – 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 9 – 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. You can also seek a home inspection to ensure the property is safe and habitable.

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

Pros and Cons of Renting to Own

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: