Rent to own real estate is a fast-growing segment of the rental management industry. Many people in the current economic climate have low credit scores which make it impossible for them to qualify to purchase a home. If they do qualify, but the tenant's credit is not up to par, their interest rates will most likely be high. In many areas of the country, property owners are renting their properties instead of selling them since the housing market is slow and home prices are low. A rent to own contract is one potential solution for both parties.
A rent to own agreement is basically the same as a regular lease agreement. The tenant agrees to pay rent and the standard deposits. In addition to a rent payment, the rent to own contract includes a purchase-option fee which is usually between 1% and 5% of the property’s sale price. After a purchase price is agreed upon, and locked in by the parties, the tenant pays the rent plus an agreed upon amount each month as a rental premium, which accrues as part of the down payment. The option fee may or may not be part of the down payment. The option fee is for the consideration of the opportunity to purchase the real estate at a price that is locked in. After an agreed upon period of time, the tenant agrees to apply for a loan and purchase the property. Find a more in-depth discussion about rent to own at LandLordStation.com.
Land Lord Station offers a rent to own lease agreement example below. This sample includes some of the provisions that have to be added to a normal rental agreement in order to make it a rent to own agreement. Also listed below are some other suggested provisions. Be sure to check the laws of your state and make your rent to own contracts conform to those laws. We always recommend that you consult an attorney before entering into a legal agreement.
Rent to Own Contract Sample Provisions:
Parties: Same as standard lease, however, the parties are often referred to as “Landlord/Seller” and “Tenant/Buyer”.
Premises Description: (same as standard lease) and including any items that would normally be included in a Real Estate Purchase Contract.
Term: Lease term beginning and ending with the following verbiage added: If the Tenant/Buyer fails to exercise the option by such time and date, the option will automatically terminate and the Landlord/Seller will be entitled to retain the non-refundable consideration in the amount of (option to buy amount here) and (rental premium amounts here).
Lease Payments: Tenant/Buyer shall pay (regular lease payments here) that are non-refundable payments to be retained by the Landlord/Seller as rental for the premises. In addition, Tenant/Buyer shall pay (amount agreed upon for down payment installments) as a rental premium. The monthly rental premium amount will be held in escrow by the Landlord/Seller until such time as this agreement is fulfilled. At that time, the Tenant/Buyer shall secure a loan on the property and purchase same. This extra payment amount shall revert to Landlord/Seller in total and shall be considered the down payment on the property.
Deposit amount: At the time of the execution of this Contract, the Tenant/Buyer shall pay to Landlord/Seller, a deposit in the amount of ($amount) to be applied as follows:
Damage Deposit under rental agreement in the amount of ($amount)
Pet Deposit under rental agreement in the amount of ($amount)
Non-refundable Option Consideration for rent to own in the amount of ($amount)
For a total deposit amount of ($total).
Additional verbiage: If the Tenant/Buyer defaults on the provisions of this Contract, all deposits, options and additional portions of rental premium intended as down payments become the property of the Landlord/Seller.
Additional Section: Right of Assignment is a provision that you may want to include in your lease. Can the Tenant/Buyer assign the option to a third person?
Additional Section: Closing terms and conditions can be set out in detail and should be within 30 to 60 days from the time Tenant/Buyer exercises the option. This can include a list of costs and prorations and specify which party will pay each.
A Tenant/Buyer might wish to do a title search at his or her own expense to verify that the Landlord/Seller has clear, marketable title to the property prior to entering into an agreement. If the Tenant/Buyer finds that the title is unmarketable after an agreement has been signed, the Contract becomes null and void and the Landlord/Seller becomes responsible for the costs of the title search and must reimburse the Tenant/Buyer for the cost of the search. The Tenant/Buyer is entitled to a refund of any option and rent premiums that have been paid. If the Landlord/Seller refuses to reimburse the Tenant/Buyer, it may be necessary institute a court action. To avoid the expense of a court action and the disappointment of finding that the property does not have clear title, it is recommended that a title search be performed before an agreement is entered.
These above provisions are in addition to the terms in your normal Lease Agreement. Modify and insert these additional provisions as needed. If you believe that a rent to own contract is the choice for you, be sure to check with your attorney about the laws in your state, and with your accountant regarding the tax consequences.
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