A typical rent-to-own arrangement has 2 parts: The first is the rental or lease agreement, and the second is the purchase option. The lease agreement is like any other rental contract. It lists the set amount of monthly rent the tenant will pay while they live in and use the home, and it sets the rules around that arrangement, such as what they can and can’t do to the property. The purchase option, on the other hand, gives the tenant the right to buy the home during or at the end of the rental period.
There are also 2 different types of agreements for rent-to-own properties: lease-option agreements and lease-purchase agreements. Both agreements allow a renter to lease a home for a set period of time and then buy the home at the end of the lease. However, there are some differences between these contracts that are important to understand. Let’s explore the 2 types and how they differ.
Lease-Option Agreement
When a tenant signs a lease-option agreement, they usually pay an option fee to the homeowner, so they can buy the home at the end of the lease term. The rent money, also known as rent credit, is money the renter pays over the course of the lease that goes toward the down payment if they choose to buy the home.
This process usually involves an appraisal to determine how much the home is worth. Most of the time, the option fee reduces the purchase price of the property. If the renter isn’t interested in buying the home, they can walk away from the option fee, which allows it to expire, but they then lose that money along with the rent credits acquired.
Lease-Purchase Agreement
For a lease-purchase agreement, the renter still puts a certain percentage of their rent payments toward a down payment to buy the home. However, it differs from a lease-option agreement as the renter has an obligation to buy the home at the end of the lease.
The renter and the seller will agree to a purchase price when the lease is signed. Setting a price beforehand gives the renter a better idea of how much money they’ll need when they go to take out a mortgage. Selecting a lease-purchase agreement means renters should start shopping around for a loan while living in the home or when a price is agreed upon.
It’s a good idea for a renter to make sure they qualify for a loan during their lease period because if they fail to qualify for a mortgage at the end of the lease (due to their credit score or for other reasons), they’ll give up the claim to the home and all of the rent credit they’ve accumulated. The homeowner can also sue the renter for breach of contract if they don’t buy the home.
