RENT TO OWN CONTRACTS

Many families dream of having their own house. This is, after all, part of the American Dream. Or for that matter, of every person in every country. One popular way of realizing this dream is by entering into a rent to own contract. This is a deal where you rent a property that you will buy at a later time. A rent to own agreement is a written contract between two parties – the owner of the property (the seller) and the tenant (the buyer) renting the property.

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Components of a rent to own contract

A rent to own contract isn’t that uncommon. It is a traditional lease to own contract where you have the option to buy the rented property after the start of your tenancy. Both you and your landlord can benefit financially from such an agreement. Here are the main components of rent to own contracts templates:

  • The Rental Agreement
    In the agreement, the property’s title remains with the landlords until you exercise your option to purchase the property. This means that the start of the agreement is the tenancy and not the purchase transaction of the house. This also means that the underlying agreement in a lease to own home contract is similar to a standard lease agreement between the two parties.
  • The Option to Purchase
    The inclusion of this component in the rent to own agreement grants you an option to purchase the rented property within a set time period in exchange for a fee that you would pay upfront.
    This option fee is in the form of a rent amount, some of which, you would apply to the purchase of the house. Should you choose not to exercise the option to purchase, you won’t get a refund of the rent or the option fee.

 

Downloadable Templates:

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How does a rent to own contract work?

Most people who plan to buy a house need a mortgage and to qualify, you must have good credit standing and a certain amount of cash for the down payment. This is the traditional method of homeownership and without the requirements, you have to settle for rent.

The alternative to this is to enter into a rent to own home contract. This involves renting a property for a set amount of time with the option to purchase it when the lease ends. Rent to own contracts templates consist of the main parts that we have discussed in the previous section.

A lease to own contract is a bit more complex than a standard lease agreement. This should give you more reason to take extra precautions to protect your interest. Such precautions help you decide whether the deal you’re about to enter is a good option when looking for a home to buy. Here are some points to explain how a rent to own contract works:

  • Upfront Fees (non-refundable)
    In this type an agreement, you will pay the landlord a one-time upfront fee which is non-refundable. Paying this grants you the option to purchase the house at a set date in the near future. There isn’t any standard rate for the option fee although it is negotiable.
  • Lease Option versus Lease Purchase
    Keep in mind that there are varying rent to own agreements with some of them being more flexible and customer-friendly than others. The lease option gives you the right, not the obligation to purchase the house when the lease ends. Should you decide later on when the lease expires not to purchase the property, you can walk away with no issues.
    Then there is the lease-purchase agreement where you are legally obligated to purchase the home at the end of the tenancy whether you can pay for it or not. What you should have is a lease-option contract where you still have the choice to purchase the property but won’t get burdened with obligations if you change your mind into buying.
    Just to make sure you don’t get into any legal trouble, it’s best to review the contract with a qualified real estate lawyer before affixing your signature. This way you will know your rights and what you’re getting into,
  • Setting the purchase price
    Before entering into a lease to own contract, make sure it specifies how and when to determine the home’s purchase price. In most cases, you and the landlord should come to agree on the purchase price before signing the contract.
    In some cases, the price is only determined after the lease ends and its basis would be the property’s current market price. Most buyers would rather “lock-in” the price, especially since home prices tend to increase over time.
  • Apply rent to the principal
    Since you will pay rent throughout the duration of the lease, there is the issue on whether part of each payment gets applied to the purchase price of the house. It is typical that the rent would be a bit higher than the going rate for the area.
  • Purchasing the property
    With a rent to own home contract, you’re obligated to purchase the house upon the expiration of the lease. This can cause problems, most especially when you can’t get a mortgage for the house. That is why lease option agreements are always preferable because they’re more flexible and that you don’t get the risk of getting sued if you’re unable or unwilling to purchase the house when the lease ends.

How long are rent to own contracts?

When drafting rent to own contracts templates, the main goal is to be in a good financial position at the end of the rental period. This period on the average can last from 1 to 5 years. How long you want it depends on how long you think it will take to get your financial affairs ready to apply for a mortgage.

The rights and obligations in rent to own contracts

Rent to own contracts are common traditional rental contracts that give buyers the option to purchase a rented home at the end of the lease contract. This is most common among single-family homes although it can also apply for duplexes, condos or apartments.

This agreement can offer benefits for both the seller and the buyer. Although it’s similar to an ordinary lease agreement, rent to own agreements have their own features:

  • Rent Payments
    This is the same as the standard rent payment in a lease contract where you would have to pay timely rent payments of the set monthly fees. In a rent to own form, the rent is significantly higher than the traditional setup and this is because a percentage of the rent goes into an escrow account.
    This is part of the deal and it’s the duty of the landlord to set aside part of the rent. Upon purchase of the house at the end of the rent lease, the landlord applies this set aside amount to the principle of the house or give it back to you. In such a manner, you will build equity in the house during the rent period.
  • Maintenance
    You, not the landlord, be the one responsible for the maintenance of the property in this agreement. This is completely fair because, at the end of the day, you will own the home.
  • Enforcement.
    The landlord will still own the property under such an agreement until you exercise the right of the purchase. Even if you’re responsible for its maintenance and repairs, you still have to follow the terms of the agreement.
    This means that you can’t have unauthorized pets or residents if the contract explicitly specifies these terms. If you violate the terms, the purchase option will get voided and you can lose your option fee.

Can you get out of a rent to own contract?

Affixing your signature on a rent-to-own contract means you’re agreeing to buy the house when the lease ends. This agreement provides you with the necessary time to obtain financing if you currently are not in a position to purchase the house. The downside of this situation is that you cannot change your mind that easily.

Should you decide that you no longer want to purchase the home, you would lose the initial money you shelled out to enter into the agreement. But there could be certain circumstances when you can still get out of the contract. Here are some steps to do this:

  • Take a look at the agreement and check id there are contract contingencies
    A contract contingency is a stipulation allowing you to get out of the contract. Most common of these contingencies include appraisal, approval inspections, and loans.
  • Have a conversation with the landlord
    Explain your predicament and the reasons why you cannot buy the house. The landlord may understand your situation and may even agree to offer options, like extending the lease period of your agreement.
  • Look for any material breach in the terms of the contract
    If you can find such a breach in the contract, this can render it irreparably broken. Seek the advice of a lawyer to help you out with this.

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