With a rent-to-own agreement, you can start paying on a home without having a mortgage or using a bank. You and the seller sign a lease-option agreement that has all the terms of the rental and the sale. Under the agreement, you pay rent and an option fee to the seller each month. The seller keeps the rent, with the option fee going toward the home's sale price. Once you reach the option period, you can buy the home at the price in the agreement. If you're a buyer involved in a rent-to-own home, you need to protect yourself so you don't lose money or sign an agreement with unfavorable terms.
Go over your personal finances. Check your credit score and history. Estimate how long it would take you to raise the score, clean your credit up and save enough to qualify for a traditional mortgage. If you don't expect to qualify when your option is active, you stand to lose your option money to the seller. Confirm you have enough money to cover minor repairs to home, as the responsibility for some repairs and routine maintenance falls on you as the buyer.
Ask for an escrow account. Your rent and option payments should go into a separate escrow account handled by the bank as opposed to the seller's private account. The seller still gets the money if you don't buy the home at the end of the rental period, but you'll get the money back if the seller walks away.
Get all terms of the rent-to-own agreement in writing. Make sure the agreement includes the monthly rent, the purchase price, the rental and option periods and amounts, the responsibilities of both parties, any cancellation clauses and all other details you and the seller worked out. A cancellation clause is an event that allows you or the seller to walk away without penalty for breaking the agreement. You may ask the seller to include a cancellation clause covering you if your job is transferred out-of-state, for example.
Ask for a copy of the proposed agreement. Review the agreement to make sure the terms are correct. Consider contacting an attorney in your area and having the agreement reviewed before you sign. Tell the seller if changes are needed. Review the final agreement carefully before you sign.
Follow all the terms of the agreement. You can cost yourself money if you fail to follow the agreement. For example, if your agreement has you forfeiting the option money if you pay rent late, you're losing money if you don't pay on time.
Save all proof of your rent and option payments. Don't pay in cash. Use checks or money orders. Keep canceled checks and money order receipts in a safe place.
- Negotiate with the seller for terms that benefit you. For example, if the agreement is going to have a forfeit clause for late rent payments, ask for a grace period, such as two weeks.
- Verify the seller owns the home if you're not using any legal counsel. Contact the local property tax department or the county recorder's office to confirm the seller is the current owner of the property.
- Make sure you're getting a lease-option agreement and not a lease-purchase agreement. A lease-purchase agreement requires the buyer buy the home at the end of the lease term, while you can back out at the end of an option agreement without penalty.
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