How to Approach Rent to Own

Home ownership can be within your reach with a rent-to-own contract.
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You’ve decided to buy your dream home but there is a problem. You have little or no cash for a down payment and a credit report issue must be resolved. The good news is you can still move forward with your plans. A rent to own method, referred to as a lease option, gives you, as tenant, the right to purchase the property at an agreed on price within an agreed on period of time. If you decide the property isn’t right for you, you’re not legally obligated to carry through with the purchase. The key to successful lease option transactions is proper preparation and attention to detail.

Step 1

Consult a mortgage lender before entering into a rent to own contract. Find out, approximately how much you might qualify for and how long it will take you to qualify for a home mortgage. This meeting is free and gives you a financial road map to follow for loan qualification.

Step 2

Do your homework. Think of it as if you are signing a typical contract to purchase the home. Inspect the house and the neighborhood thoroughly. Consider the possibility of spending many years in this property. Verify that the home has enough bedrooms, bathrooms and other features that will allow you to live comfortably.

Step 3

Enter into a standard residential lease agreement between you and the landlord stating monthly rent and lease option credits. Verify the prevailing rents by comparing other similar rental properties in the area. The landlord may request a higher than market rent, which would represent the market rent plus a premium to be applied as a rent credit toward the property's purchase price, if you choose to exercise the option. Keep in mind, however, that if you choose not to exercise the option, this additional premium is not returned to you, but belongs to the owner.

Step 4

Create a lease to purchase option agreement to accompany the residential lease agreement. State in writing an agreed upon purchase price, allowing enough time for you to repair any credit issues, accumulate a down payment and qualify for your home loan. Two or three years are typical. One-year option contracts generally do not provide enough time. Look at similar, nearby homes that have sold in the last six months to determine a fair price. Ensure the price is fixed and don’t be afraid to negotiate for a lower price.

Step 5

Clarify the lease option fee in your option agreement. This up-front, good-faith fee is negotiable and nonrefundable if you choose not to buy the home. Option fees generally range from 1 to 5 percent of the purchase price but can vary depending on the location. Verify that the option fee will be credited toward your purchase price if you choose to exercise the option.

Step 6

Add in the agreement an agreed upon down payment amount and a monthly rent credit that will apply to your down payment. A rule of thumb is 15 percent, but this is negotiable. A late rent payment typically cancels out any credit for that specific month and may void the entire deal..

Step 7

Determine your maintenance obligations and put them in writing on the option agreement. You are technically a tenant and the owner remains a landlord until the end of the rental lease. Limit your financial responsibility to a specific dollar amount, leaving repairs of major items such as heating and air conditioning as the owner’s responsibility during the lease term.

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