Rent-To-Own Homes: How The Process Works

As featured in

In a typical home purchase, the sale takes place shortly after the offer has been accepted, and the transaction is completed at closing. Since most buyers don’t have the money to pay cash, a mortgage is usually used to finance the purchase: The buyer puts down a certain percentage of the purchase price (the down payment), then pays the lender in regular installments over a period until the balance is paid off in full.

To qualify for a mortgage; however, potential buyers need to have a good credit score and cash for a down payment. Without these, purchasing a home in the traditional way may not be an option. There is an alternative: a rent-to-own agreement. When buyers sign this kind of contract, they agree to rent the home for a set amount of time before exercising an option to purchase the property when or before the lease expires.

Here’s how rent to own works, and when it may be a good choice for someone looking to buy a home.

Elements of a Rent-to-Own Contract

In a rent-to-own agreement, potential buyers get to move into a house right away, with several years to work on improving their credit score and/or saving for a down payment. While many states have their own regulations, and no two rent-to-own contracts are alike, someone in a rent-to-own agreement typically rents the property for a set amount of time (usually one to three years), after which he or she can purchase the house from the seller. It’s not as simple as paying rent for three years and then buying the house: Certain terms and conditions must be met, in accordance with the contract.

Option Money: In a rent-to-own agreement, the potential buyer pays the seller a one-time, usually non-refundable fee called option money, or option consideration. This gives him or her the option to purchase the house in the future. It is important to note that some contracts (lease-option contracts) give the potential buyer the right but not the obligation to purchase when the lease expires. If he or she decides not to purchase the property at the end of the lease, the option simply expires. If the wording is “lease purchase,” without the word option, the buyer could be legally obligated to purchase the property at the end of the lease. Clarifying the wording is one of many reasons buyers should have the contract vetted by a real estate attorney before agreeing to it.

The size of the option is negotiable. There’s no standard rate. It typically ranges between 2.5% and 7% of the purchase price. In some (but not all) contracts, all or some of the option money may be applied to the purchase price at closing. That’s a valuable clause. Consider that if a home has a purchase price of $200,000 and a 7% option consideration, the buyer would need to pay $14,000 up front.

Purchase price: The contract will specify when and how the purchase price of the home will be determined. In some cases, the buyer and seller agree on a purchase price when the contract is signed – often at or higher than the current market value. In other situations, the buyer and seller agree to determine the price when the lease expires, based on market value at that future point in time. Many buyers prefer to “lock in” the purchase price if possible, especially in markets where home prices may be increasing.

Rent: During the term of the lease, the potential buyer pays the seller a specified amount of rent, usually each month. The lease term is negotiable but frequently ranges between one and three years. In many contracts, a percentage of each monthly rent payment is applied to the purchase price. For example, assume the contract states that the buyer will pay $1,200 each month for rent and that 25% of that will be credited to the purchase. If the lease term is three years, the buyer will earn a $10,800 rent credit to apply toward the purchase ($1,200 x 0.25 = $300; $300 x 36 months = $10,800). Often, the rent charged by the seller will be slightly higher than the “going rate” for the area to accommodate the rent credit the buyer receives.

Maintenance: Depending on the terms of the contract, the potential buyer may be responsible for maintaining the property and paying for any repairs, homeowners association fees, property taxes and insurance. Because the seller is ultimately responsible for association fees, taxes and insurance (it’s still his or her house, after all), the seller may choose to cover these costs. Even in that case, the buyer still needs a renter’s insurance policy to cover losses to personal property and provide liability coverage if someone is injured while in the home or if the buyer accidentally injures someone.

Be sure that maintenance and repair requirements are specified in the contract. Maintaining the property – mowing the lawn, raking the leaves and cleaning out the gutters – is very different from replacing a damaged roof.

Purchasing the property: If the potential buyer decides not to purchase the property (or is unable to secure financing) at the end of the lease term, the option expires. The buyer forfeits any money paid until that point, including the option money and any rent credit earned. If the buyer cannot purchase the property but has a legal obligation to (as stated in the contract), legal proceedings may be initiated.

If the buyer wants to purchase the property, he or she typically applies for financing (i.e., a mortgage) and pays the seller in full. According to the terms of the contract, a certain percentage of the option money and rent paid may be deducted from the purchase price. The transaction is completed at the closing, and the buyer becomes a homeowner.

Ideal Candidates for Rent to Own

A rent-to-own agreement can be an excellent option for people who want – but are not financially ready – to become homeowners. A rent-to-own agreement gives them the chance to get their finances in order (by improving their credit score and saving money for a down payment, for example) while “locking in” the house they’d like to own. If the option money or a percentage of the rent goes toward the purchase price, they also get to start building some equity.

To make rent-to-own work, potential buyers need to be confident that they’ll be ready to make the purchase when the lease term expires. Otherwise, they will have paid the option money – which could be substantial – and a premium on rent for 12 to 36 months, with nothing to show at the end.

If there’s a good chance would-be buyers still won’t be able to qualify for a mortgage or secure other financing by the time the lease expires, they should instead continue renting (with a “normal” lease), building credit and saving for a down payment. Then, when they’re ready, they can choose from any home on the market in their price range.

The Bottom Line

A rent-to-own agreement allows potential buyers to move into a house (maybe even their dream home) while getting their finances in order to purchase the home several years in the future. It’s not without risks since they could end up losing money if they don’t (or cannot) buy the property when the lease expires. It’s vital for buyers to read and understand every word of the contract and know exactly what they’re getting into.

For example, if the contract can become void if the buyer is late on one payment – he or she needs to know that in advance. Or if the seller can evict the buyer for not doing repairs, that needs to be understood before committing. A rent-to-own agreement is a legally binding contract that often includes complicated language. Even if a real estate agent assists with the process, it is essential for buyers to consult with a qualified real estate attorney who can clarify the contract and their rights, before signing anything.


31 replies
  1. jordan 4 says:

    Thank you so much for providing individuals with such a remarkable opportunity to read critical reviews from this web site. It is often so great and also packed with a lot of fun for me and my office co-workers to search the blog particularly thrice per week to study the new secrets you will have. Of course, I am also actually amazed considering the eye-popping principles you give. Certain 3 ideas in this posting are clearly the most effective I’ve ever had.

  2. basketball shoes says:

    I precisely had to say thanks yet again. I am not sure what I might have created without the type of tactics discussed by you concerning such a subject matter. It had become the intimidating circumstance for me personally, however , considering this expert style you processed that forced me to leap with fulfillment. I’m happier for this information and believe you know what a powerful job you happen to be getting into teaching some other people via your websites. More than likely you’ve never come across any of us.

  3. yeezy says:

    I in addition to my guys have already been going through the nice guides on your web site then at once got an awful feeling I had not thanked the blog owner for those techniques. My men came so glad to read through all of them and have simply been using these things. Appreciate your truly being really helpful and for obtaining such wonderful issues most people are really wanting to be aware of. My honest regret for not expressing appreciation to sooner.

  4. hogan outlet online says:

    I and also my guys were found to be looking at the excellent things found on your website and so then I had an awful feeling I never expressed respect to the web blog owner for those secrets. All of the guys were definitely consequently happy to see all of them and have now in fact been taking pleasure in these things. Appreciate your actually being simply helpful as well as for obtaining variety of fine issues most people are really eager to understand about. Our own honest apologies for not expressing gratitude to you sooner.

  5. adidas nmd says:

    Needed to send you a little observation to be able to thank you very much again regarding the lovely opinions you’ve discussed here. This has been simply particularly generous of people like you giving easily all a few individuals would have offered for sale as an electronic book to make some cash for their own end, principally since you could possibly have tried it if you considered necessary. These smart ideas additionally worked like a good way to fully grasp other individuals have similar eagerness the same as my very own to know the truth good deal more concerning this issue. I know there are numerous more pleasurable moments ahead for individuals who examine your blog post.

  6. cheap nba jerseys says:

    I simply needed to say thanks all over again. I do not know what I would’ve implemented in the absence of the entire information documented by you relating to my situation. This has been a very distressing concern in my circumstances, however , considering a new professional tactic you dealt with it forced me to leap over fulfillment. I’m happier for this support and believe you are aware of a great job you were undertaking training most people thru your webpage. Probably you haven’t met any of us.

  7. nike roshe uk says:

    This web page is really a stroll-by for the entire information you needed about this and didn抰 know who to ask. Glimpse right here, and also you抣l positively uncover it.

  8. yeezy boost 350 v2 says:

    I precisely desired to thank you very much all over again. I am not sure what I could possibly have done without the secrets shown by you over such a area. It was actually a very frustrating matter in my position, however , coming across your specialized avenue you treated it took me to weep for gladness. I am just happier for the assistance and pray you realize what a powerful job you have been accomplishing teaching people today by way of your webpage. I know that you have never encountered any of us.

  9. furtdsolinopv says:

    It¦s actually a great and useful piece of information. I¦m happy that you just shared this helpful information with us. Please stay us up to date like this. Thank you for sharing.

  10. retro jordans says:

    This is the best blog for anyone who wants to seek out out about this topic. You realize so much its almost exhausting to argue with you (not that I truly would need匟aHa). You definitely put a new spin on a topic thats been written about for years. Nice stuff, simply great!

  11. nike zoom says:

    I’m often to blogging and i really respect your content. The article has actually peaks my interest. I am going to bookmark your site and preserve checking for brand new information.

  12. Adidas NMD XR1 White Line says:

    After study a couple of of the weblog posts in your web site now, and I actually like your approach of blogging. I bookmarked it to my bookmark web site checklist and will be checking again soon. Pls check out my website as nicely and let me know what you think.

  13. yeezy shoes says:

    I am commenting to make you be aware of of the cool encounter my child gained viewing your webblog. She came to understand such a lot of pieces, including what it’s like to have an incredible coaching mindset to have many others with ease fully understand certain tortuous subject areas. You actually exceeded our desires. Thank you for displaying the precious, trusted, revealing as well as fun tips about the topic to Evelyn.

  14. michael kors outlet store says:

    This is the suitable blog for anybody who needs to find out about this topic. You understand a lot its virtually hard to argue with you (not that I truly would want匟aHa). You undoubtedly put a new spin on a subject thats been written about for years. Great stuff, simply great!

  15. adidas ultra boost 3.0 says:

    Thank you for each of your labor on this web page. Gloria loves participating in investigation and it’s easy to understand why. A number of us know all concerning the powerful means you offer priceless guides on this web site and in addition inspire response from the others on that topic plus my simple princess is in fact studying a whole lot. Enjoy the remaining portion of the new year. You’re the one doing a powerful job.

  16. air force 1 says:

    Oh my goodness! an incredible article dude. Thank you Nonetheless I’m experiencing subject with ur rss . Don抰 know why Unable to subscribe to it. Is there anybody getting equivalent rss downside? Anybody who is aware of kindly respond. Thnkx

  17. mlb jerseys says:

    There are certainly lots of particulars like that to take into consideration. That is a great point to deliver up. I provide the thoughts above as common inspiration however clearly there are questions just like the one you convey up where an important thing might be working in honest good faith. I don?t know if finest practices have emerged round issues like that, but I am certain that your job is clearly recognized as a good game. Each boys and girls feel the affect of only a second抯 pleasure, for the rest of their lives.

  18. yeezy boost 350 v2 says:

    I really wanted to make a small message so as to thank you for some of the great facts you are sharing on this site. My incredibly long internet investigation has finally been rewarded with reputable points to go over with my companions. I ‘d claim that most of us readers actually are very much lucky to dwell in a notable network with many outstanding professionals with very beneficial opinions. I feel somewhat happy to have discovered your entire website and look forward to many more excellent moments reading here. Thanks a lot once again for all the details.

  19. adidas yeezy says:

    I wish to show thanks to this writer just for bailing me out of this type of condition. Right after searching through the world wide web and getting concepts that were not productive, I figured my life was over. Living without the answers to the issues you’ve fixed by way of your good write-up is a crucial case, and the ones which could have adversely affected my entire career if I hadn’t discovered your site. Your expertise and kindness in playing with all the stuff was helpful. I am not sure what I would have done if I hadn’t encountered such a stuff like this. It’s possible to now look forward to my future. Thank you very much for your reliable and results-oriented guide. I won’t hesitate to propose the blog to any individual who needs and wants care about this situation.

  20. nike roshe run says:

    When I originally commented I clicked the -Notify me when new comments are added- checkbox and now every time a comment is added I get four emails with the same comment. Is there any approach you can remove me from that service? Thanks!

  21. yeezys says:

    I happen to be writing to let you know what a awesome discovery my girl obtained studying your web page. She discovered a wide variety of issues, with the inclusion of how it is like to possess an amazing coaching heart to make folks with no trouble learn about certain hard to do topics. You undoubtedly did more than readers’ desires. I appreciate you for presenting such practical, dependable, explanatory as well as cool guidance on your topic to Sandra.

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.