Rent To Own Overview
What Is Rent To Own?
(Renting With An Option To Buy)
Without realizing it many people are already familiar with this type of arrangement. Basically renting a home with an option to buy is very similar to what you do when you lease a car.
When leasing a car, you provide a non-refundable up-front payment (a down payment), you agree to a fixed monthly payment for a specified period of time for the use of the car (2 years, 3 years, etc.) and you have the exclusive right (but not the obligation) to purchase the car for a pre-determined price at the end of the agreement. Since most consumers are already familiar with this arrangement in car leasing, they shouldn’t be too confused when a similar structure is applied to real estate transactions.
There are three major differences between the two arrangements:
- The laws pertaining to the transfer of ownership of motor vehicles are different than the laws that apply to the transfer of ownership of real property.
- Real estate rent-to-own arrangements typically involve a portion of the monthly rent being applied towards the purchase price. In car leasing, this is not the case.
- Car values depreciate over time while real estate values typically appreciate.
In general however, real estate rent-to-own agreements behave much like car lease agreements.
The Eight Main Components Of A Rent-To-Own Agreement:
There are Eight Main Components of a Rent-To-Own agreement and any, or all, of these are subject to negotiation between a tenant/buyer and a landlord/seller.
The Term specifies the length of time a tenant/buyer 1) is required to make rent payments, 2) is allowed to occupy the property, and 3) has the exclusive right (but not the obligation) to purchase the home.
- Monthly Payment (Rent)
The monthly payment the tenant/buyer is required to pay to the landlord/seller in order to occupy the residence.
- Payment Credit
The Payment Credit (Rent Credit) specifies what portion of each month’s payment (rent) is to be credited towards the purchase price. (if and when the buyer exercises their option to purchase).
- Option Premium (Non-Refundable, Up-Front Payment)
The Option Premium specifies how much the buyer is required to pay (up-front) for the exclusive right (but not the obligation) to purchase the property within a specified period of time. This is a non-refundable payment that is typically credited towards the purchase price if the tenant/buyer eventually buys the home. However, if, at the end of the term, the tenant/buyer does NOT purchase the home, the landlord/seller is entitled to keep this money.
- Purchase Price
The Purchase Price is the predetermined amount at which the tenant/buyer is permitted to purchase the home at, (or before), the end of the option term. In car leasing terminology, this is called the buy-out price.
- Option Term
The Option Term specifies how long the buyer's option to purchase will be in effect. This usually coincides with the lease term.
- Assignment Of Rights
Will the tenant/buyer have the right to assign his or her rights to another party? In other words, will the tenant/buyer be allowed to sell his or her option to buy the home or sublet the home to someone else? If so, under what conditions and terms?
- Renewal or Extension of the Term
Options have a specified lifespan and unless something is negotiated in advance, at the conclusion of the agreement the tenant/buyer must 1) Purchase the home at the predetermined price or 2) Vacate the home, forfeit the option consideration and forfeit any monthly credits towards the purchase price. If the tenant/buyer wants to extend the term, the landlord/seller could expect an additional option fee. Whether the past accrued monthly rent credits are to be carried over into the new lease/option agreement is something that both parties would need to workout. Whether the conditions for an extension are to be included in the original agreement is something that needs to be negotiated.
Depending upon your specific circumstance and depending on whether you are the prospective tenant/buyer or the prospective landlord/seller, you would want to negotiate the definition of each of the above eight items to your advantage.
Click To Read: “How To Buy A House Using A Lease Option”
Learn the advantages, the disadvantages and the pitfalls from a tenant/buyer's prespective.
Click To Read: “How To Sell A House Using A Lease Option”
Learn the advantages, the disadvantages and the pitfalls from a landlord/seller's prespective.
Rent-To Own is NOT a standard method for conveying the ownership of real property. Tenant/buyers and landlord/sellers often turn to this type of arrangement when the standard methods for selling real property do not, or cannot, work. As a result many people try to use Rent-To-Own as a scheme to prey upon someone who is at a disadvantage.
Therefore, before considering a Rent-To-Own arrangement, you must familiarize yourself with the pros, the cons, the risks and the pitfalls. In New York, Rent-To-Own is an unusual real estate arrangement and many attorneys are unfamiliar with how to structure one. Before entering into a Rent-To-Own agreement, seek the advice of an attorney who is familiar with this type of agreement and have that attorney review the documents before signing them.
In general, as long as both parties are seeking to structure a win-win agreement, a Rent-To-Own agreement is a credible method of transferring ownership of real property that is helpful when there are unusual conditions or circumstances. As long as both parties stand to benefit from the arrangement, it can result in a transfer of ownership that, otherwise, might not have been possible.
How To SELL A Rent To Own Home
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