How Key Provisions in a Rent-To-Own Contract Work in Your Favor

Understanding a rent-to-own contract can be very difficult. After reading this article you'll have a better understanding of the contract and what some of the terms mean. Basically a rent-to-own contract gives the tenant the option to purchase the home after an agreed lease period. You should note there are different types of leases and the wording usually indicates the contract type. A "lease option" contract gives the buyer the choice instead of the obligation to purchase at the end of the lease. However, if the text of the contract is worded as a "lease purchase", without the word option, the buyer could be legally obligated to buy the property at the end of the lease. Take some time to review some of the important aspects of a rent-to-own least contract.

The Option Fee Acts as a Down Payment

There is almost always an upfront fee required by the seller called an "option fee". This fee is typically between 2.5 and 7 percent. The option fee acts as a down payment and will be deducted from the purchase price of the home. This fee is basically the same as a refundable security deposit in a rental agreement except the deposit goes towards the purchase at the end of the lease. However, if you choose not to exercise your option to buy the home, you will forfeit the option fee.

Monthly Rent Allocated Towards the Purchase of the Home

Upon completion of the rental period, you will have the option or the obligation to purchase the home depending on the type of lease. During your time as a tenant in the home, you are required to pay rent on a monthly basis. The main difference between a rent-to-own contract and a common rental lease agreement is a percentage of the rental money is typically placed in escrow which is called a "rent premium." At the end of the lease the rent premium and the option fee are both allocated towards the home’s purchase price. It is a good idea to make use of the time available during your lease term to improve your credit and build your savings. If you are unable to exercise your option to purchase the home at the end of the lease period, you might lose your option fee and all your rent allocated towards the purchase price.

The Purchase Price

As with any home purchase you'll want to get the home appraised before you make the purchase. The purchase price is locked in at the agreed price at the time the lease contract is signed. This means the home could be worth more or even less than the agreed price by the time the lease period has expired.

The key aspects discussed above are common in a rent-to-own contract, but may function differently on an individual basis. Before signing a rent-to-own contract, it is recommended a real estate attorney review the contract to ensure that all the provisions are fair and in-line with standard practices.

Take the time to look through our rent-to-own home listings to find a home that is right for you.

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