The Best Way to Rent to Own

The option contract is the rent-to-own agreement.

The option contract is the rent-to-own agreement.

Purchasing a home with a rent-to-own contract is an alternative to the standard home purchase. You sign a contract with the homeowner that details the terms of the rent-to-own agreement and allows you to rent for a time before purchasing the property. The dangers inherent in this nontraditional home buying method warrant close attention to each step in the process and calling in the experts when necessary.

Avoid Scams

Remember the “if it’s too good to be true…” rule. Avoid rent-to-own opportunities where homeowners or developers promise that you can buy a home with bad credit, little income and no down payment. Be on the lookout for homeowners who charge high option fees and cancel rent-to-own contracts quickly for small violations. Check your state laws to learn what legal protections are available to you. Many states do not regulate rent-to-own agreements, in which case advice from an attorney can prevent you from signing a bad deal. Jumping into a rent-to-own agreement before performing some research will leave you with little protection against unscrupulous homeowners and developers.

Understand the Purchase Option

You will need to survive the rental period of your tenancy if you plan to exercise the purchase option in your rent-to-own contract. That means understanding the option contract and how it works. Most important is the period during which you can exercise your option to purchase the home. The option contract, also called a lease-purchase agreement, outlines the details of the rent-to-own agreement, including the terms of the tenancy and the requirements you must meet before you can exercise the purchase option. A contract without a clear path to a purchase option is not suitable for a rent-to-own agreement.

Sign an Enforceable Contract

Your option contract must include certain provisions to be enforceable, according to NOLO. The provisions protect your legal right to exercise the purchase option. An enforceable option contract must specify the selling price or identify a process for determining the selling price at the proper time. The contract should include the period during which you may exercise the buy option and include a process for you to notify the landlord of your intent. Some states require the inclusion of the same property disclosures found in standard home-buying contracts. If the homeowner fails to abide by the terms of the option contract, you can take legal action to enforce the contract.

Ask the Right Questions

Ask the right questions to make sure that favorable terms, especially those related to money, are included in your option contract. Ask about the appraisal process, who pays property taxes and who is responsible for property maintenance. Ask how much of the money you pay is credited to your down payment and under which circumstances are your fees refundable. Ask for a provision in the contract that allows you to build equity in the home. Clarify in the contract if the seller is your mortgage lender or if you will need to obtain a mortgage loan. The absence of these provisions or lack of clarity can result in the loss of your money, cancellation of your contract and eviction.

Add Sales Contract Provisions

Once you exercise the purchase option, you and the owner enter into an irrevocable sales contract. Include in the option contract agreed-upon provisions for the actual sale of the property, such as the details of the closing, title requirements and the terms of payment. You leave these important sales terms to chance if sales contract terms are not included in the option contract. In the absence of a separate sales contract, make sure that your option contract provides the same legal protections you would have with a standard home purchase.

Speak to a Loan Officer

Many rent-to-own agreements fail because the tenant does not qualify for a mortgage loan in time to satisfy the terms of the option contract. If you are considering rent-to-own as the way to purchase a home, speak to a loan officer about how to qualify for a mortgage loan. Ask the loan officer to detail the steps you should follow to obtain the loan within the period specified in the option contract. You might need to improve your credit rating or lower your bills. Armed with this information, you can ensure that you will qualify for the mortgage loan when it is time.


About the Author

Gail Sessoms, a grant writer and nonprofit consultant, writes about nonprofit, small business and personal finance issues. She volunteers as a court-appointed child advocate, has a background in social services and writes about issues important to families. Sessoms holds a Bachelor of Arts degree in liberal studies.

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