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:
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- 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
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Since a rent-to-own contract is a kind of combination between a Lease Agreement and a Real Estate Purchase Agreement, there are many details you need to include.
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:
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- 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.
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Other details about the lease:
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- 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?
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Other details about the purchase:
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- 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?
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Other legal details:
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- 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.
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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:
| Landlord/Seller | Tenant/Buyer |
|---|---|
Lost Money
| Lost Money
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Lost Time
| Lost Time
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Mental Anguish
| Mental Anguish
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Rent-to-Own Agreement Sample
Below you can find what a rent-to-own agreement typically looks like:
Rent-to-Own Agreement
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.