What’s Included?” The Basics of a Rent-to-Own Agreement
A rent-to-own lease agreement is a binding legal document that enables an individual to reside in a property temporarily while reserving the right to purchase the property at a predetermined price after the lease ends. This arrangement combines the flexibility of renting with the long-term benefits of purchasing, fitting into a property deal or business model. Essentially, a rent-to-own lease agreement secures an option to buy within a regular lease agreement. The rent-to-own lease agreement acts as an option for the tenant. It helps evaluate whether living in the property is suitable before making a more permanent commitment. The agreement should cover the length of the lease , the monthly rent, and the purchase price. Such agreements offer the tenant an opportunity to save money while residing in a property. Rental-to-own agreements benefit sellers and buyers alike. For sellers, it maintains cash flow from property while encouraging a resident who may also be a buyer. For buyers, it allows them to test the waters of whether the home or apartment is right for them to live in as their own.
Key Features of a Rent-to-Own Deal
Several components are critical to a rent-to-own agreement. The most important is the amount of the monthly payments. They must be acceptable to both parties. While they usually are higher than similar traditional lease payments due to the value of the option fees, the specific amount is negotiable.
There will need to be an option fee. This is a sum paid up front for the tenant’s right to purchase the property. The fee compensates the landlord for taking the property off the market until the tenant commits to buying it.
The length of the lease period also must be addressed. Most rent-to-own deals generally run from one to three years or more. Once the tenant becomes the legal owner, the landlord is released from all liability and responsibility for the property.
The agreement needs to outline how the ultimate sale price will be determined. It could be a fixed price or based on the market value at the time of sale. The pricing should be discussed in detail and a compromise agreed upon.
The lease must address the possibility of potential repairs and improvements by the tenant. Will the tenant be responsible? What if the tenant is unable to afford the repairs? Who is responsible if the tenant is unable to take possession of the property for some reason, such as military deployment?
While all of these components are fundamental to a proper rent-to-own agreement, there are a number of other important details that also should be addressed in plain language to avoid any potential problems.
Pros and Cons of Rent-to-Own Agreements
A Rent to Own Lease Agreement has its benefits and risks. The benefit for the buyer is the ability to move into a home that they wish to purchase. They need a home NOW, but cannot or do not want to take out a mortgage now, so are looking for a way to buy a house, but are willing to be flexible in the timing. Sellers benefit from being able to sell their house and receiving income in the meantime as the buyer pays rent. Rent-to-Own also gives the buyer the ability to test whether this is the right house for them before committing to buying it.
The risks are primarily to the seller, who may end up having a buyer who lacks the ability to get a mortgage and thus may never buy the property. The buyer is also at risk of paying for improvements that they cannot get back. Although a judge may award the cost of improvements back, the buyer will be forced to remove the improvements and pay the costs of undoing what they did.
Legal Risks & Protections
It is imperative that both parties fully understand the scope of their rights and responsibilities. As a practical matter, landlords must ensure that the amount paid in rent is consistent with the fair market rent for the property. Failure to do so can draw scrutiny from state regulators. Further, additional scrutiny will be given to requirements placed upon tenants such as assignment, additional fees for an extension of the purchase option, limits on the rights of the tenant to sell or otherwise dispose of their interest in the property, notification to the tenant that an extension of the purchase option will be considered vacating to the property, or the tenant being considered in default. Any of these requirements may have a chilling effect upon a tenant’s desire to exercise their rights to purchase the property in the future. There are many state-mandated forms that include specific language that essentially protect the tenant from any such adverse actions by the landlord.
Another very important legal consideration for both parties is to ensure that they follow the notice requirements for any payment, especially if payment is made to an online portal and not directly to the other party. Problems can arise if the other party claims to have not received payment. In order to ensure compliance with the legal notice of non-payment, this should be done by certified mail with return receipt requested.
One item that should always be included in a rent-to-own lease agreement is a clause that gives both parties the opportunity to cancel the agreement and its associated purchase option with a set period of advance notice.
A Rent-To-Own Agreement Template
It is critical in any commercial property transaction that all of the terms and conditions have been explicitly agreed upon by the parties and documented in writing. With a rent-to-own lease agreement, it is doubly important that each party seek the advice of their attorney to draft appropriate provisions in this legal document. These provisions must first clearly identify when and how the tenant’s right to purchase the property would happen, as well as detail the process for notifying the landlord that the tenant wishes to exercise this right. A properly written rent-to-own agreement would include information such as the following:
• The total consideration or price for the house would be due at the end of the lease period , and partial credit would be given for what the tenant has paid toward the monthly rental amount
• The payment of the earnest deposit is due when the agreement is signed
• Outlines what happens to the earnest deposit and the monthly rental amounts if the tenant does not exercise the purchase option
• Details how much of the money paid is considered rent and how much is a credit toward the purchase price
• States who bears the costs of repairs and maintenance
• Includes remedies for both the buyer and seller
• Provides for resolution if the deal falls through
As with any type of real estate transaction, it is important that each party to the agreement has a clear understanding of its terms and provisions before signing. An experienced real estate attorney can help explain what the conditions would mean and make sure that all provisions are legally enforceable.
How to Make a Rent-to-Own Agreement Using PDF Templates
If you are using the PDF rent-to-own agreements available on our website, you will notice that the free version of the lease does not include any notes or comments. The intention is that you will print the free version and make your own notes in the margins or on a yellow pad that accompanies the printed pages. However, two clients in the past year have requested the use of a PDF version that they could customize without the need to have a hard copy at the same time. Unfortunately, Adobe Acrobat and other PDF editors will not allow you to add notes or comments to an unprotected PDF document without paying for an add-on feature, which is not something I was willing to do.
However, some sites offer "fillable" PDF documents that allow you to place information in and simply print them out without notes or comments. Websites such as legalzoom.com offer free versions as long as the documents are not modified in any way. But if you check their terms, you will see that you cannot modify the free version. And LegalZoom has been known to enforce their trademark protection if another site builds upon their documents.
In our current website upgrade project, we are adding more functionality to our PDF documents to allow for the basic customization required by our clients. In a few months, you will be able to download customizable versions of our lease documents, which will make it easier to get them filled out quickly for your own use.
FAQs About Rent-to-Own Agreements
There are many questions homeowners have about rent-to-own lease agreements. Following are answers to some of the most common questions:
1) Where do I get a rent-to-own lease agreement?
We have prepared two blank rent-to-own lease agreements on this page for free download as Word files. You may use either one of those agreements without paying anything to us or hiring us, but we make no representations about the sufficiency of those agreements or whether they meet your needs.
2) What does one of those agreements cost that you have prepared?
Nothing.
3) Why are you giving away something I have to pay a lawyer to draft?
We’re not giving anything away – we’re taking something back. You see, when we first entered this business, we charged for our services. We charged for drafting documents, for recording deeds, and so on. We felt justified in charging because we put in a lot of time and effort learning the law and customizing these documents for our clients. So when we drafted a quitclaim deed or special warranty deed, we could charge a flat fee because we had grown so efficient in drafting that we could prepare it quickly and easily. We didn’t even mind if someone called us with a question after they paid – we were still happy to help them.
But then we realized that in many cases we were doing all that work for nothing because someone else was. A person looking for help online, for example, would often find a blog post or video we had published helping a person in need – and that was all it took. Instead of calling us, they would make the document themselves or have someone else do it. And then they’d get a lawyer to review the documents, and that lawyer would say "This is great!" and give the person the green light.
That is not good for a lawyer’s business.
In other words, all we were charging our clients for was to save them time. And we were failing to provide that service to a large percentage of people who found our free materials online and accomplished the task themselves or with another lawyer.
So we asked ourselves what we could do to make sure people who wanted a lawyer’s help could find a lawyer’s help. That’s when we decided to charge only for legal services and give away what we used to charge for – at least much of it.
4) Why rent-to-own? Why not just look for a house to buy?
We think it’s great to get a mortgage and own a house outright in the long run. Generally, people prefer being owners to renters. But we also see the pain many people go through in trying to get financing, especially when they suddenly have a life circumstance that makes obtaining a mortgage difficult or impossible .
Rent-to-own agreements allow us to help people in those situations by giving the assurance of homeownership without going through the difficult steps needed to secure financing.
5) I don’t know where to find information on the validity of rent-to-own agreements.
By "validity" you mean "legality" when you should mean "versus, say, a mortgage." There are many forms of home ownership, whether legal or not, and conventional home loans are very recent in the 10,000 year history of home ownership. Don’t get too hung up on the "legality" of a scenario, assuring yourself no judge would ever sell the deed out from under you. Many judges have sold deal out from under people because of breach in the contract with the seller. So let’s look instead at what you’re really asking: how enforceable would a contract between me and the seller to buy the home during the next 2 years be when we put down the earnest money? You won’t find an example anywhere of a lawsuit that says "I’m making a claim against this seller because of that contract." So you’re asking whether it would be a successful lawsuit if that suit were to be filed after the contract with the seller is broken or because the seller backed out.
The facts in every lawsuit are unique, so there will always be a judge with his own opinions. For what it’s worth, judges don’t want to throw people into the street if they’ve been making their payments. A few days of technical default (a day late on payment) won’t get someone evicted. It would take a lot more.
6) Am I better off renting than renting-to-own?
It’s difficult to get out of a lease before you have to turn in the keys. In most leases, the penalty is to pay the rest of the rent due as damages for leaving early. That means you’re stuck in that home until you find a sublease. In contrast, a rent-to-own agreement enables you to walk away without penalties – you may even lose your security deposit. But you’re not out paying any more than the next person.
7) Can I get a rent-to-own lease agreement online or just by asking a Title Company or real estate agent?
Just like a trust, deed, will, or any other estate planning documents, you can get a rent-to-own agreement online or by asking a Title Company. In some cases, you may even find one for free. But every person’s particular situation has unique qualities to it, and until those qualities are taken into account, the one-size-fits-all document you have isn’t sufficient to meet your needs.