How to Write a Contract for Rent-to-Own Housing

Rent-to-own real estate contracts are also referred to as lease-options.

Rent-to-own real estate contracts are also referred to as lease-options.

Rent-to-own contracts have grown in popularity and can be a good option for homebuyers who have found a home they'd like to purchase, but who need a little time to get their finances in order. This type of alternative financing allows the buyer to lease the home for a specified amount of time, repair credit issues while living in the home and make payments towards the principal. At the end of the lease, the buyer is permitted to purchase the house. When writing a contract for rent-to-own deals, it's important to consider some key elements.

Purchase Price

Although the home is rented before being purchased, it's important to clearly spell out the terms of the purchase contract before moving in. This eliminates any confusion or ill feelings down the road when it's time to move forward. Buyers and sellers should come to an agreement on the final purchase price along with any other considerations, such as who pays for home repairs and homeowner's insurance during the lease period. Try not to leave any questions or details unanswered. It's always best to get it in writing.

Option Fee

Typically, an option fee is required when both parties agree to the terms of the contract. This fee is typically non-refundable in case of default, and serves as a type of upfront good faith amount. You and the seller will need to set an amount you can live with, but typically options fees range from 1 to 5 percent of the purchase price. The good news is that this fee is normally applied to your down payment when it comes time to buy.

Monthly Payment and Premium

The seller will usually ask for a fair market monthly rental payment, and a rental premium in addition to that. A rental premium is added to the monthly rent and will be applied to your purchase price as well. This can be a great way for homebuyers to save money for a down payment, but should be specified clearly how much per month will be applied to the principal at closing. It's also important to define to whom and where the monthly payments will be made.

Length of Term

The length of the term should be long enough to allow you to fix or repair whatever financial issues are holding you back from obtaining a conventional home loan. Most rent-to-own contracts have a term of at least one year or more and may allow a buyer up to five years, depending on contract details. Most buyers will want and need to convince the seller to delay closing as long as possible, but many sellers will seek a shorter term.

Ask A Pro

Alternative financing contracts are usually very complex and you may need the help of a pro in order to protect your best interests. Although it may cost money upfront, the cost to you in the long run may be much greater if you neglect to seek assistance. Don't be afraid to call a local real estate agent or attorney to review your contract or even write it up for you. You can still dictate the terms of the agreement -- but there may be some vital aspects of the deal you may have missed.

 

About the Author

Meribeth Phipps has been a real estate broker since 2000, specializing in residential new home sales. She holds a bachelor's degree in business and marketing.

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