Renting to own can be a complicated process because there are essentially two separate agreements – a purchase agreement and a lease agreement, which has rules and regulations you must follow.
Buying a house is a major purchase so it’s important to consider the options when it comes to rent to own agreements and be aware of the details.
These agreements are purchase contracts with a lease included. You’re putting the home under contract when you sign and will be obligated to purchase the property when the lease portion of the agreement ends.
This option is best if you already have a good amount of financing in place. If you need to work on your credit score or debt to income ratio, you could use the lease period to work with a lender to get on track to be approved for a loan.
All of the elements of a home sale are included from the beginning. You may have to pay earnest money or option money. The amount could be anywhere from 1 to 5 percent depending on what’s normal in the area.
If it’s treated as earnest money, it will be applied to the purchase price and may be refundable under certain circumstances. If it’s treated as option money, it’s normally non-refundable and may not apply to the purchase price.
You could also have a due diligence period to have an inspection and find out more information about the home. You can end the contract during this time if there are major issues. If you terminate the contract, it would be up to the seller/landlord to decide to let you continue with the lease portion of the agreement. If you go this route, it would be advisable to complete the inspection and start the lease after you know you’re buying the home.
You’ll also want to make sure you have the money to buy the house when the lease ends. Before signing the contract you should speak with a reputable lender to make sure you can buy the home within that amount of time.
Lease with an option agreement
This alternative may be safer if you’re not sure you’ll be able to buy the home after the lease ends. When you sign the contract, you’ll pay option money that gives you the ability to exercise the option to purchase the house. This money is usually non-refundable and won’t be applied to the purchase unless otherwise stated.
The terms of the purchase should be outlined including the sale price and close date. It will also tell you how to exercise the option and the time period required. Usually, you have to give notice you’re exercising the option a certain amount of days before the lease ends.
Leases with an option agreement are less risky if you’re unsure of your ability to get the necessary financing. You would’t be obligated to buy the home unless you decide to exercise the option.
With either of these contracts, the agreement might include rent that is above market value to help with the eventual home purchase. The extra rent would be placed into an escrow account to be applied at closing. This could help you save for the down payment. If you’re unable to complete the purchase or decide not to exercise the option, the money would go to the seller/landlord.
It’s important to avoid eviction and obey all lease terms. If you miss payments or make other violations, you could be evicted for breach of contract and your money will be lost.
Since renting to own can be a complicated agreement, it’s a good idea to have a realtor or real estate attorney help draw up the contract. They can help you identify fraud and understand all of the terms of the agreement.