Purchasing a homes can require a substantial down payment. It will also require the borrower to meet minimum credit score requirements. For some these requirements may put purchasing a home out of reach. Another option is how to rent to own a home. This process allows you to rent a home with the option to purchase it at a later date.
An option contract is a right to buy a property during a specified amount of time, at a specified price. The buyer (optionee) must give consideration to the seller (optionor). This consideration is usually a non-refundable payment. The buyer has until the end of the period to purchase the home or they lose the payment. An option contract must contain the following 5 elements:
- In Writing: Option Contracts must be in writing to be enforceable
- Price and Terms: Must state the agreed purchase price and any terms
- Length of Time: Contract must have a definitive length of time
- Legal Description: Contract must contain the legal description of the property in the contract
- Consideration: The optionee must pay specified valuable consideration, usually money
Option contracts do not have to be in a rent to own situation. Many investors use this contract when purchasing investment properties.
A lease option is frequently used in a rent to own agreement. A lease option will consist of two contracts: 1) a standard lease 2) an option contract. The lease will be used to govern the relationship will the buyer is renting the property from the owner. The Option Contract will then specify the price and terms of how the property will be purchased at the end of the contract. Since both the lease and the option contract must have end dates, many chose to have them coincide.
The advantage to the buyer is that they will have time to save for additional down payments or improve their credit score. Sellers have the benefit of having the home occupied and collecting rent. This is beneficial if they have already moved and are looking to purchase a new home. The important part of the lease option is that it give the buyer (optionee), the right but not the obligation to purchase the property.
Traditionally, if the buyer exercises the right to buy the property, the money paid for the option can be applied toward the purchase price. Some contracts may also allow some or all of the rent paid to be applied.
Another option in how to rent to own a home is a lease purchase. This similarly contains two contracts: 1) a standard lease 2) a Purchase and Sale contract. The main difference between this and the Lease Option is that both parties have agreed to consummate a sale at the end of the lease. In this case, the buyer is obligated to abide by the terms of the purchase contract.
One advantage to the buyer is if they need to sell their home before buying a new one, but need to move anyway. This will prevent them from having to qualify and pay for two mortgages while they wait for their first home to sell. Sellers may find themselves in a similar situation, needing to move prior to having sold their home. Lease Purchase contracts may contain clauses requiring the renter/buyer to perform maintenance duties during the lease term.
We hope you have enjoyed reading how to rent to own a home. It can be a tricky process and will usually require the assistance of a Realtor and a Real Estate Attorney. If you have any questions about the process, please contact us to learn more.
John R Neal