Once you have found the perfect rent-to-own opportunity, you may want to quickly move ahead and grab the home before someone else does. However, it’s important to take some time and familiarize yourself with a rent-to-own contract known as a lease option, before moving forward.
A lease-option is a contract which dictates important terms of the rent-to-own agreement. Knowing the ins and outs of this type of contract will help you to protect yourself from potential scams during the rent-to-own process.
If you have seen a normal lease contract in the past, a lease-option agreement will look familiar to you. Lease option agreements closely resemble a normal lease agreement with the addition of the option to purchase the home after a set period of time, or money, is put toward the home. Understanding this contract is critical to ensuring you are walking away with favorable terms, resulting in your future-ownership of the home.
Purchase OptionThe purchase option is the most notable clause within a lease-option contract. The purchase option should clearly detail everything that you and the buyer have discussed and agreed-upon in regards to future purchase of the home. Common purchase option clauses include:
This portion of the contract details the length of the lease term, as well as what is expected of both the buyer and the seller at the end of the lease. With lease-option contracts, this clause will also include information about how to proceed if the tenant is unable to execute the sale. Some alternatives include extending the lease option, terminating the agreement, forfeiting the deposit, and more.
Rental Terms:Because the lease-option contract closely resembles a rental contract, this portion of the contract may contain familiar language. His includes important information detailing your rental terms, such as:
A property requires regular and basic maintenance in order to maintain property value and standard of living. It’s important that your lease-to-own agreement contains language that details what types of repairs and maintenance the landlord is responsible for, as well as the tenant. This could include expensive repairs such as correcting a leaky roof or plumbing problems. This also protects the landlord by stating what types of upgrades or modifications the tenant needs to seek approval for, prior to making changes to the home.
Option Fee / DepositWhen renting-to-own the normal renters deposit is now referred to as an option fee. This fee is usually about 3% of the property value. This deposit is generally put toward the final purchase price of the home, and is accounted for in the lease. Keep an eye out for potential clauses that may cause you to forfeit your deposit, such as the inability to purchase the home within a set period of time.
Default:Most least-option contracts will include a clause which describes the terms for the default payment. These terms can include how many days after the due date of your rent a late fee will be assessed.
Examination of TitleThe final sale should include terms that allow the tenant/buyer to examine the title and give the tenant/buyer time to report any valid objections they may find.
Utilities and Taxes / CovenantsA good lease-option agreement will also detail out who is responsible for the payment of utilities as well as any applicable taxes. In the majority of cases, utilities are paid by the tenant and the seller is responsible for the payment of any property taxes.
Closing CostsBecause you are eventually purchasing the home, your contract should lay out clear information regarding closing costs and who is responsible for what. This is a standard clause in real estate contracts. If a tenant exercises their option to purchase the home, the closing costs will generally be paid by the tenant/buyer. Because closing costs can be considerable, they should be factored in to your budget for the purchase of the home. Closing costs can include fees and costs for the following:
Because acquiring financing is unpredictable, the finance clause states that the tenant/buyer of the property is solely responsible for obtaining financing. This provides a statement in writing about the risks involved with buying a rent-to-own home, and absolves the seller of responsibility should the tenant be unable to acquire financing to purchase the home when the agreement ends.
Before signing any contracts, it’s important to always consult with a local real estate attorney regarding any contracts you are presented with. Alternatively, hire a real estate attorney to draft a contract for you. This agreement should be agreeable to both parties.