A Rent-to-Own Agreement, also known as lease-to-own, is a written document between two parties, the landlord or potential seller who owns the 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 parties to lease the property while also granting the tenant the option to purchase the property at 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 some option consideration or premium.
This consideration can be a set amount paid upfront – typically between 2.5%-7% – or it can be a portion of the monthly rent payments.
While the fee or any premium is non-refundable, a tenant can usually apply it as a credit to the purchase price if exercising the option.
When Do I Need a Rent-to-Own Contract?
Landlords use a rent-to-own agreement when a tenant wants to rent a property for a set amount of time, usually several years, and have the option to purchase the property at or before the end of the term.
Often, a tenant cannot purchase the home 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 a rent-to-own home 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|
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 security deposit, if any, and details on repayment at the end of the 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.
- Purchase Price: The tenant’s purchase price if buying the property.
- Earnest Money Deposit: A 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 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 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 exclusive to 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: Is the tenant allowed to 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 where the landlord and tenant can receive notifications regarding the agreement.
- Severability: State that if one provision is invalid, it will not affect the validity of the rest of the agreement.
- Binding Effect: Note that the agreement will bind the parties and their heirs
- Governing Law: Decide which state’s law controls the agreement.
- Amendments: State the number of amendments to the agreement allowed.
- Disputes: Include how parties will resolve disputes – by mediation, arbitration, litigation, or a combination.
- Entire Agreement: Affirm that the agreement is the entire agreement and supersedes all other contracts.
Consequences of Not Using a Rent-to-Own Agreement
Tenants/buyers and landlords/sellers would have fewer options without a rent-to-own agreement.
The landlord might not follow through on an oral promise to sell the property at a specific purchase price at the end of the lease term. Or the tenant might deny promising to pay for all maintenance and repairs on the property.
The parties might also have to decide outright between renting or selling the property, 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:
|Lost Money||Lost Money
|Lost Time||Lost Time
|Mental Anguish||Mental Anguish
Rent-to-Own Agreement Sample
Below you can find what a rent-to-own agreement typically looks like:
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.
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 month-to-month until the landlord or tenant terminates it).
Step 6 – Enter Rent Details
8. Rent. Provide the rent amount (calculated on a monthly basis), 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 time 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. Guest/Visitor Policy. You can choose whether or not to provide a guest or visitor policy.
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.