Rent-to-Own Agreements: Get to Know the Basics Fast

 

Lets start getting to know the basics by looking at the Good and Bad details of lease-to-own home agreements. In addition to this, there are about 6 other big things you need to know but lets start here first. Shall we?

This is great for folks who are tired of reading all the articles and getting pulled into rabbit holes of information overload. However, pay attention to the bad parts as well to avoid problems that may arise later on.

Anna Arnopolsky published an article at Nolo.com that addressed this issue. She offered the key components of the Rent-To-Own Agreement

“A rent-to-own agreement is made up of two agreements: a standard lease agreement, and an option to purchase; these may be incorporated in one document or two separate documents.” Here is the cut-n-dry about it:

The Lease or Rental Agreement

In a rent-to-own agreement, the title to the house remains with the landlord until the tenant exercises his or her option and purchases the property. In other words, the starting point of this kind of an arrangement is a tenancy, not a house purchase transaction. The underlying agreement in a rent-to-own arrangement is therefore identical to a regular lease agreement between a landlord and a tenant, including terms such as the duration of the lease period, the amount of rent to be paid, and repair and maintenance responsibilities of landlord and tenant. For more details about common clauses see the Nolo article, Ten Terms to Include in Your Lease or Rental Agreement.

The Option to Purchase

An option to purchase grants the tenant an option (right) to buy the rental property within a specified period of time in exchange for a fee (option fee), that is usually paid up front, and/or in the form of a higher-than-market rent (some of which is applied to the house purchase). A tenant who does not exercise the option to purchase is not entitled to a refund of the option fee or any refund in rent. Because so much is at stake for both landlord and tenant, it is crucial that the option to purchase covers all important terms and conditions such as the duration of the option period and the purchase price of the house. For more details about these key issues, see the Nolo article, Key Terms in Option-to-Purchase Agreements.

Don’t forget about the obligations of Tenants and Landlords Under a Rent-to-Own Agreement

Here are a few ways lease agreements with a lease-option component vary from traditional leases.

Payment of Rent and Setting Aside Monthly Rent Payments Varies

Just as in a standard lease or rental agreement, the tenant has a duty to make timely and exact payments of rent. In a rent-to-own arrangement, rent payments are often higher than they would have been had the transaction been a standard lease agreement. This is because an agreed-upon percentage of the monthly rent is typically placed in an escrow account. It is the landlord’s duty to set aside the agreed-upon percentage of rent. The landlord either reserves the escrow funds and refunds the tenant upon purchase of the home, or simply applies a percentage of the rent payments toward the principle of the house. In this manner, the tenant builds equity in the house throughout the duration of the lease agreement.

Tenant Makes Necessary Repairs to the Rental Property

Unlike a traditional lease, in which the landlord is typically responsible for making all repairs, rent-to-own tenants usually repair the rental property at their own expense. Many landlords and tenants consider this a fair bargain since, presumably, the tenant will eventually own the home.

Tenant Must Fulfill Lease Obligations

Until the tenant exercises the option and purchases the rental property, the premises are owned by the landlord. So, in addition to making repairs, the tenant must also comply with all other duties outlined in the lease. This means that the tenant must not have pets if the lease prohibits pets, must not house unauthorized residents, must not engage in criminal activities, and must not do anything else that is forbidden by the lease. If the tenant violates the lease, the option will become null and void. The tenant will likely forfeit both the option fee and the percentage of the monthly rent payments, depending on the terms of the option-to-purchase agreement.

The Tenant Should Inspect the House and Order an Appraisal

Although the tenant may never exercise the option to purchase the rental property, tenants should always inspect the premises and order an appraisal before signing a lease with an option to purchase. Here’s why:

  • The future purchase price of the home is often agreed upon at the time the rent-to-own agreement is signed. An appraisal will ensure that the tenant is paying a fair price for the home.

  • A thorough inspection can determine whether the tenant will need to make future major repairs such as those to restore leaking roofs, broken HVAC and heating units, or clogged sewage drains, and help the tenant make the decision of whether entering into the agreement is sensible. In some states, landlords who lease a home with an option to purchase must disclose important information about the condition of the property, providing extra protection to tenants who are buying a home under a lease-option agreement. Check your state law on required real estate disclosures.

  • Visit our other post to see if this (rent to own home ownership) could be for you in 2017! 

     

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